Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~Yes~~ ☒Yes No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ~~Yes~~ ☒Yes No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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

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

For the Three and Nine Months ended September 30, ~~2020,~~2021, and September 30, ~~2019~~2020

			Additional			Accumulated			Other						Total
			Paid-In			Retained			Comprehensive			Treasury			Stockholders’
(In millions)	Par		Capital			Earnings			Income (Loss)			Stock			Equity
Balance, December 31, 2018	$	1.1	$	798.3		$	1,726.5		$	(108.0	)	$	(1,095.9	)	$	1,322.0
Net income	—		—			72.2			—			—				72.2
Dividends paid on common stock	—		—				(12.7	)	—			—				(12.7	)
Change in other comprehensive income (loss) – net of tax	—		—			—				(5.9	)	—				(5.9	)
Stock based compensation	—			13.5		—			—				(5.5	)		8.0
Acquisition of treasury stock	—		—			—			—				(11.2	)		(11.2	)
Balance, March 31, 2019	$	1.1	$	811.8		$	1,786.0		$	(113.9	)	$	(1,112.6	)	$	1,372.4
Net income	—		—				80.9		—			—				80.9
Dividends paid on common stock	—		—				(12.8	)	—			—				(12.8	)
Change in other comprehensive income (loss) – net of tax	—		—			—				(4.2	)	—				(4.2	)
Stock based compensation	—			6.1		—			—			—				6.1
Balance, June 30, 2019	$	1.1	$	817.9		$	1,854.1		$	(118.1	)	$	(1,112.6	)	$	1,442.4
Net income	—		—				80.3		—			—				80.3
Dividends paid on common stock	—		—				(14.4	)	—			—				(14.4	)
Change in other comprehensive income (loss) – net of tax	—		—			—				(43.0	)	—				(43.0	)
Stock based compensation	—			8.8		—			—				(0.6	)		8.2
Acquisition of treasury stock	—		—			—			—				(55.7	)		(55.7	)
Balance, September 30, 2019	$	1.1	$	826.7		$	1,920.0		$	(161.1	)	$	(1,168.9	)	$	1,417.8

																										Accumulated
			Additional			Accumulated			Other						Total					Additional						Other						Total
			Paid-In			Retained			Comprehensive			Treasury			Stockholders’					Paid-In			Retained			Comprehensive			Treasury			Stockholders’
(In millions)	Par		Capital			Earnings			Income (Loss)			Stock			Equity			Par		Capital			Earnings			Loss			Stock			Equity
Balance, December 31, 2019	$	1.1	$	829.9		$	1,978.9		$	(118.7	)	$	(1,245.1	)	$	1,446.1		$	1.1	$	829.9		$	1,978.9		$	(118.7	)	$	(1,245.1	)	$	1,446.1
Net income	—		—				42.4		—			—				42.4		—		—			42.4			—			—				42.4
Dividends paid on common stock	—		—				(14.2	)	—			—				(14.2	)
Change in other comprehensive income (loss) – net of tax	—		—			—				(36.6	)	—				(36.6	)
Dividends paid on common stock ($0.17 per share)																		—		—				(14.2	)	—			—				(14.2	)
Change in other comprehensive income (loss)– net of tax																		—		—			—				(36.6	)	—				(36.6	)
Stock based compensation	—			15.2		—			—				(7.2	)		8.0		—			15.2		—			—				(7.2	)		8.0
Acquisition of treasury stock	—		—			—			—				(24.6	)		(24.6	)	—		—			—			—				(24.6	)		(24.6	)
Balance, March 31, 2020	$	1.1	$	845.1		$	2,007.1		$	(155.3	)	$	(1,276.9	)	$	1,421.1		$	1.1	$	845.1		$	2,007.1		$	(155.3	)	$	(1,276.9	)	$	1,421.1
Net loss	—		—				(1.0	)	—			—				(1.0	)	—		—				(1.0	)	—			—				(1.0	)
Change in other comprehensive income (loss) – net of tax	—		—			—				17.3		—				17.3
Change in other comprehensive income (loss)– net of tax																		—		—			—				17.3		—				17.3
Stock based compensation	—			(0.5	)	—			—			—				(0.5	)	—			(0.5	)	—			—			—				(0.5	)
Balance, June 30, 2020	$	1.1	$	844.6		$	2,006.1		$	(138.0	)	$	(1,276.9	)	$	1,436.9		$	1.1	$	844.6		$	2,006.1		$	(138.0	)	$	(1,276.9	)	$	1,436.9
Net income	—		—				9.7		—			—				9.7		—		—				9.7		—			—				9.7
Change in other comprehensive income (loss) – net of tax	—		—			—				52.8		—				52.8
Change in other comprehensive income (loss)– net of tax																		—		—			—				52.8		—				52.8
Stock based compensation	—			0.5		—			—				(0.5	)		0.0		—			0.5		—			—				(0.5	)	—
Balance, September 30, 2020	$	1.1	$	845.1		$	2,015.8		$	(85.2	)	$	(1,277.4	)	$	1,499.4		$	1.1	$	845.1		$	2,015.8		$	(85.2	)	$	(1,277.4	)	$	1,499.4


																										Accumulated
																				Additional						Other						Total
																				Paid-In			Retained			Comprehensive			Treasury			Stockholders’
(In millions)																		Par		Capital			Earnings			Loss			Stock			Equity
Balance, December 31, 2020																		$	1.1	$	849.7		$	1,996.4		$	(59.6	)	$	(1,277.4	)	$	1,510.2
Net loss																		—		—				(14.0	)	—			—				(14.0	)
Change in other comprehensive income (loss)– net of tax																		—		—			—				(19.1	)	—				(19.1	)
Stock based compensation																		—			11.8		—			—				(2.0	)		9.8
Balance, March 31, 2021																		$	1.1	$	861.5		$	1,982.4		$	(78.7	)	$	(1,279.4	)	$	1,486.9
Net income																		—		—				2.2		—			—				2.2
Change in other comprehensive income (loss)– net of tax																		—		—			—				5.5		—				5.5
Stock based compensation																		—			8.2		—			—			—				8.2
Balance, June 30, 2021																		$	1.1	$	869.7		$	1,984.6		$	(73.2	)	$	(1,279.4	)	$	1,502.8
Net income																		—		—				9.0		—			—				9.0
Change in other comprehensive income (loss)– net of tax																		—		—			—				(20.6	)	—				(20.6	)
Stock based compensation																		—			3.7		—				-			(0.6	)		3.1
Balance, September 30, 2021																		$	1.1	$	873.4		$	1,993.6		$	(93.8	)	$	(1,280.0	)	$	1,494.3

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

We maintain qualified and nonqualified defined benefit retirement plans covering certain current and former U.S. and European employees, retirement savings plans covering eligible U.S. and U.K. employees and certain postretirement health care and life insurance benefit plans covering eligible U.S. retirees. We also participate in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations.

All costs related to our pensions are included as a component of operating income in our ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~operations.~~Operations. For the quarters ended September 30, ~~2020~~2021 and ~~2019,~~2020, amounts unrelated to service costs were a charge of $0.3 million and a benefit of ~~$0.5~~$0.5 million, ~~and $0.8 million,~~ respectively. For the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, amounts unrelated to service costs were a charge of $0.6 million and a benefit of ~~$1.6~~$1.6 million, ~~and $2.5 million,~~ respectively.

We generally fund our U.S. non-qualified defined benefit retirement plans when benefit payments are incurred. We ~~have~~ contributed approximately ~~$0.5~~$0.5 million in the first nine months of ~~2020~~2021 to cover unfunded benefits. We expect to contribute a total of ~~$1.4~~$0.7 million in ~~2020~~2021 to cover unfunded benefits. We contributed ~~$0.5~~$0.5 million to our U.S. non-qualified defined benefit retirement plans during the first nine months of ~~2019.~~2020.

We contributed ~~$3.0~~$2.2 million and ~~$3.3~~$1.9 million to our European defined benefit retirement plans during the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020 respectively. We plan to contribute approximately ~~$5.0~~$5.6 million during ~~2020~~2021 to our European plans.

We recorded ~~$0.3~~$0.2 million and ~~$0.2~~$0.3 million of net amortization gain deferral for the quarters ended September 30, 2021 and 2020, respectively, and ~~2019, respectively; and $0.8~~$0.6 million and ~~$0.7~~$0.7 million for the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively. Net periodic benefit costs of our postretirement health care and life insurance benefit plans for the quarters and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 were immaterial.

Amounts contributed in connection with our postretirement plans were immaterial for both the nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020. We periodically fund our postretirement plans to pay covered expenses as they are incurred. We expect to contribute less than ~~$0.5~~$0.4 million in ~~2020~~2021 to cover unfunded benefits.

On occasion we enter into commodity swap agreements to hedge against price fluctuations of raw materials, including propylene (the principal component of acrylonitrile). As of September 30, ~~2020,~~2021, we had commodity swap agreements with a notional value of ~~$10.6~~$12.2 million. The swaps mature monthly through ~~March 2022.~~June 2023. The swaps are accounted for as a cash flow hedge of our forward raw material purchases. To ensure the swaps are highly effective, all of the critical terms of the swap matched the terms of the hedged items. The fair value of the commodity swap agreements was ~~a liability~~an asset of ~~$3.2~~$4.6 million ($~~0.2~~4.2 million of which was recorded in prepaid expenses and other ~~non-current liabilities)~~ current assets) and a liability of less than $0.1 million at September 30, ~~2020, and~~2021. The fair value of the commodity swap agreements was ~~a liability~~an asset of ~~$5.4~~$2.2 million ($~~1.1~~1.5 million of which was recorded in prepaid expenses and other ~~non-current liabilities)~~current assets) and a liability of $1.1 million at December 31, ~~2019.~~2020.

The effective tax rate for the quarter ended September 30, 2021 was 38.3% and included a discrete tax charge of $1.3 million primarily related to the remeasurement of the net state deferred tax liabilities. The tax ~~provision~~expense for the ~~current quarter~~nine months ended September 30, 2021 was $1.6 million and included a ~~$46.2~~net discrete tax charge of $0.8 million primarily resulting from the revaluation of U.S. and foreign deferred tax liabilities. The tax benefit for the quarter ended September 30, 2020 was $56.9 million and included a $46.2 million benefit primarily due to the release of a valuation allowance in a foreign jurisdiction due to a legal entity rationalization and treasury realignment initiative. The tax ~~provision~~benefit of $48.7 million for the first nine months of 2020 also included a ~~$2.7~~$2.7 million benefit primarily for the release of reserves of unrecognized tax benefits as a result of tax audit settlements. The quarter and nine months ended September 30, 2019 included a $3.0 million benefit primarily due to tax credits identified in the quarter. Given the adverse impact of COVID-19 on our earnings, the effective tax rate in 2020 is not meaningful.

Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional.

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

Financial information for our operating segments for the quarters and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 were as follows:


	(Unaudited)
	Composite			Engineered			Corporate &
(In millions)	Materials			Products			Other (a)			Total
Third Quarter 2021
Net sales to external customers	$	254.1		$	79.7		$	—		$	333.8
Intersegment sales		15.0			0.4			(15.4	)		—
Total sales	$	269.1		$	80.1		$	(15.4	)	$	333.8
Other operating expense		0.8			0			0			0.8
Operating income (loss)		30.0			6.5			(13.7	)		22.8
Depreciation and amortization		30.1			3.6			0			33.7
Stock-based compensation		0.7			0.1			2.1			2.9
Accrual basis additions to capital expenditures		3.7			2.8			0			6.5

Third Quarter 2020
Net sales to external customers	$	215.7		$	71.2		$	—		$	286.9
Intersegment sales		7.8			0.7			(8.5	)		—
Total sales	$	223.5		$	71.9		$	(8.5	)	$	286.9
Other operating expense		16.4			—			(0.6	)		15.8
Operating (loss) income		(36.6	)		(2.7	)		1.7			(37.6	)
Depreciation and amortization		31.7			3.9			—			35.6
Stock-based compensation		1.5			0.5			(1.7	)		0.3
Accrual basis additions to capital expenditures		4.7			1.3			—			6.0

Nine Months Ended September 30, 2021
Net sales to external customers	$	732.2		$	232.2		$	—		$	964.4
Intersegment sales		42.8			1.8			(44.6	)		—
Total sales	$	775.0		$	234.0		$	(44.6	)	$	964.4
Other operating expense		16.3			(0.5	)		0.2			16.0
Operating income (loss)		61.9			17.1			(50.2	)		28.8
Depreciation and amortization		91.4			10.9			0.1			102.4
Stock-based compensation		2.1			0.4			13.7			16.2
Accrual basis additions to capital expenditures		10.7			3.6			—			14.3

Nine Months Ended September 30, 2020
Net sales to external customers	$	960.4		$	246.2		$	—		$	1,206.6
Intersegment sales		48.0			1.6			(49.6	)		—
Total sales	$	1,008.4		$	247.8		$	(49.6	)	$	1,206.6
Other operating expense		25.5			2.7			15.4			43.6
Operating income (loss)		75.0			3.3			(43.8	)		34.5
Depreciation and amortization		94.3			11.6			0.1			106.0
Stock-based compensation		5.9			1.6			5.5			13.0
Accrual basis additions to capital expenditures		35.4			4.0			—			39.4

(Unaudited)

Composite

Engineered

Corporate &

(In millions)

Materials

Products

Other (a)

Total

Third Quarter 2020

Net sales to external customers

$
215.7

$
71.2

$
—

$
286.9

Intersegment sales

7.8

0.7

(8.5
)

—

Total sales

$
223.5

$
71.9

$
(8.5
)

$
286.9

Other operating expense

16.4

—

(0.6
)

15.8

Operating income (loss)

(36.6
)

(2.7
)

1.7

(37.6
)
Depreciation and amortization

31.7

3.9

—

35.6

Stock-based compensation

1.5

0.5

(1.7
)

0.3

Accrual basis additions to capital expenditures

4.7

1.3

—

6.0

Third Quarter 2019

Net sales to external customers

$
448.0

$
124.5

$
—

$
572.5

Intersegment sales

23.3

—

(23.3
)

—

Total sales

$
471.3

$
124.5

$
(23.3
)

$
572.5

Operating income (loss)

100.1

20.3

(10.5
)

109.9

Depreciation and amortization

30.7

3.7

—

34.4

Stock-based compensation

1.2

0.2

1.0

2.4

Accrual basis additions to capital expenditures

51.0

2.3

—

53.3

Nine Months Ended September 30, 2020

Net sales to external customers

$
960.4

$
246.2

$
—

$
1,206.6

Intersegment sales

48.0

1.6

(49.6
)

—

Total sales

$
1,008.4

$
247.8

$
(49.6
)

$
1,206.6

Other operating expense

25.5

2.7

15.4

43.6

Operating income (loss)

75.0

3.3

(43.8
)

34.5

Depreciation and amortization

94.3

11.6

0.1

106.0

Stock-based compensation

5.9

1.6

5.5

13.0

Accrual basis additions to capital expenditures

35.4

4.0

—

39.4

Nine Months Ended September 30, 2019

Net sales to external customers

$
1,419.7

$
371.7

$
—

$
1,791.4

Intersegment sales

64.0

0.1

(64.1
)

—

Total sales

$
1,483.7

$
371.8

$
(64.1
)

$
1,791.4

Operating income (loss)

324.4

51.4

(48.0
)

327.8

Depreciation and amortization

95.7

11.3

0.1

107.1

Stock-based compensation

6.4

1.4

8.1

15.9

Accrual basis additions to capital expenditures

156.8

4.1

—

160.9

(a)

We do not allocate corporate expenses to the operating segments.

At September 30, ~~2020,~~2021, the balance of goodwill and intangible assets was ~~$190.9~~$191.1 million and ~~$85.7~~$78.8 million, respectively. During the first quarter of 2020 the Company determined that the economic uncertainty caused by the COVID-19 pandemic was a trigger for an impairment review of goodwill with no other triggers for impairment identified. As a result of management’s review, we determined that it was not more likely than not that there was impairment.

Note 11 — Accumulated Other Comprehensive Loss

Comprehensive ~~income (loss)~~loss represents net ~~income~~loss and other gains and losses affecting stockholders’ equity that are not reflected in the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~operations.~~ Operations. The components of accumulated other comprehensive loss as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:

(In millions)

Unrecognized Net Defined Benefit and Postretirement Plan Costs

Change in Fair Value of Derivatives
Products (1)

Foreign Currency Translation

Total

Balance at December 31, 2019

$
(22.4
)

$
(6.9
)

$
(89.4
)

$
(118.7
)
Other comprehensive income (loss) before reclassifications

—

(2.3
)

22.7

20.4

Amounts reclassified from accumulated other comprehensive loss

(0.2
)

13.3

—

13.1

Other comprehensive income (loss)

(0.2
)

11.0

22.7

33.5

Balance at September 30, 2020

$
(22.6
)

$
4.1

$
(66.7
)

$
(85.2
)


(In millions)	Unrecognized Net Defined Benefit and Postretirement Plan Costs			Change in Fair Value of Derivatives Products (1)			Foreign Currency Translation			Total
Balance at December 31, 2020	$	(40.4	)	$	15.6		$	(34.8	)	$	(59.6	)
Other comprehensive loss income before reclassifications		(1.4	)		(0.2	)		(22.3	)		(23.9	)
Amounts reclassified from accumulated other comprehensive loss		0.5			(10.8	)	—				(10.3	)
Other comprehensive loss		(0.9	)		(11.0	)		(22.3	)		(34.2	)
Balance at September 30, 2021	$	(41.3	)	$	4.6		$	(57.1	)	$	(93.8	)

(1)

Includes forward foreign exchange contracts, interest rate derivatives and commodity swaps.

~~(1)~~

~~Includes forward foreign exchange contracts, interest rate derivatives and commodity swaps.~~

The amounts of net ~~gains~~losses reclassified to earnings from the unrecognized net defined benefit and postretirement plan costs component of accumulated other comprehensive loss for the quarter and nine months ended September 30, ~~2020,~~2021, were ~~$0.1~~less than $0.3 million less taxes of less than ~~$0.1~~$0.1 million and ~~$0.5~~$0.5 million less taxes of ~~$0.3~~less than $0.1 million, respectively. The amounts reclassified to earnings from the change in fair value of the derivatives products component of accumulated other comprehensive loss for the quarter and nine months ended September 30, ~~2020~~2021 were net ~~losses~~gains of ~~$2.6~~$1.5 million less taxes of ~~$0.6~~$0.3 million and ~~$12.7~~$4.8 million less taxes of ~~$3.0~~$1.1 million, respectively, for those related to foreign currency forward exchange contracts and ~~$1.5~~gains of $2.0 million less taxes of ~~$0.4~~$0.5 million and ~~$4.9~~$2.8 million less taxes of ~~$1.2~~$0.7 million, respectively, related to commodity swaps. We also recorded net ~~gains~~losses of ~~$0.3~~$3.8 million less taxes of ~~$0.1~~$0.9 million and net gains of ~~$0.1~~$6.5 million less taxes of less than ~~$0.1~~$1.5 million related to interest rate derivatives, infor the ~~three~~three- and ~~nine month~~nine-month periods ended September 30, ~~2020,~~2021, respectively.

Note 12 — 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 and health and safety matters. While it is impossible to predict the ultimate resolution of litigation, investigations and claims asserted against us, we believe, based upon our examination of currently available information, our experience to date, and advice from legal counsel, that, after taking into account our existing insurance coverage and amounts already provided for, the currently pending legal proceedings against us will not have a material adverse impact on our consolidated results of operations, financial position or cash flows.

Environmental Matters

We have been named as a potentially responsible party (“PRP”) with respect to the below and other 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 the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) 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 environmental matters will not be material.

Lower Passaic River Study Area

Hexcel together with approximately 48 other PRPs that comprise the Lower Passaic Cooperating Parties Group (the “CPG”), are subject to a May 2007 Administrative Order on Consent (“AOC”) with the EPA requiring the CPG to perform a Remedial Investigation/Feasibility Study of environmental conditions of a ~~17-mile~~17-mile stretch of the Passaic River in New Jersey (the “Lower Passaic River”). We were included in the CPG based on our operations at our former manufacturing site in Lodi, New Jersey.

In March 2016, the EPA issued a Record of Decision (“ROD”) setting forth the EPA’s selected remedy for the lower ~~eight~~8 miles of the Lower Passaic River at an expected cost ranging from ~~$0.97~~$0.97 billion to ~~$2.07~~$2.07 billion. This estimate does not include any costs related to a future remedy for the upper ~~nine~~9 miles of the Lower Passaic River. In August 2017, the EPA appointed an independent ~~third party~~third-party allocation expert to make recommendations on the relative liability of approximately 120 identified non-government ~~PRP’s. The allocation is~~

PRPs. In December 2020, the allocator issued its non-binding report on PRP liability (including Hexcel’s) to the EPA, which did not result in any change to Hexcel’s accrual for the Passaic matter. We do not know to what extent, if at all, this non-binding report will impact the ultimate outcome of the matter. In October 2021, the EPA released a ROD selecting an interim remedy for the upper 9 miles of the Lower Passaic River at an expected additional cost ranging from $308.7 million to be $~~completed by the end of 2020~~661.5 million..

In October 2016, pursuant to a settlement agreement with the EPA, Occidental Chemical Corporation (“OCC”), one of the PRPs, commenced performance of the remedial design required by the ROD for the lower 8 miles of the Lower Passaic River, reserving its right of cost contribution from all other PRPs. In June 2018, OCC filed suit against approximately 120 parties, including Hexcel, in the U.S. District Court of the District of New Jersey seeking cost recovery and contribution under CERCLA related to the Lower Passaic River. In July 2019, the court granted in part and denied in part the defendants’ motion to dismiss. In August 2020, the court granted defendants’ motion for summary judgement for certain claims. Discovery for the remaining claims is ongoing. ~~We do not know whether this litigation will impact~~On February 24, 2021, Hexcel and certain other defendants filed a third-party complaint against the ~~EPA’s allocation process or~~Passaic Valley Sewerage Commission and certain New Jersey municipalities seeking recovery of Passaic-related cleanup costs incurred by defendants, as well as contribution for any cleanup costs incurred by OCC for which the ~~ultimate outcome of~~court deems the ~~matter.~~defendants liable.

The accrual related to the Lower Passaic River site was approximately ~~$2.1~~$2.1 million as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Given the uncertainty associated with the many elements of the Superfund process for the Lower Passaic River, the amounts accrued may not be indicative of the amounts for which we will ultimately be responsible.

~~Omega Chemical Corporation Superfund Site, Whittier, California~~

We are a PRP at a former chemical waste site in Whittier, California. The PRPs at Omega have established The Omega Chemical Site PRP Organized Group, (the “OPOG”), and are currently investigating and remediating soil and groundwater at the site pursuant to a Consent Decree with the EPA. The OPOG has attributed to Hexcel either 1.2% or 2.18% of the waste tonnage (dependent on the specific location within the Omega Chemical Site) sent to the site. 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 ROD. The OPOG members have been served notice by the EPA as PRPs 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 OPOG, 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. The total accrued liability relating to potential liability for both the Omega site and regional groundwater remedies was $0.2 million at September 30, 2020, and at December 31, 2019.

Summary of Environmental Reserves

Our estimate of liability as a PRP and our remaining costs associated with our responsibility to remediate the Lower Passaic River and other sites are accrued in the ~~condensed consolidated balance sheets.~~Condensed Consolidated Balance Sheets. As of ~~both~~ September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, our aggregate environmental related accruals were ~~$2.5~~$2.2 million and $2.4 million, respectively, of which ~~$0.6~~$0.2 million and $0.5 million, respectively, was included in ~~current other~~ accrued liabilities with the remainder included in other non-current liabilities. As related to certain environmental matters the accrual was estimated at the low end of a range of possible outcomes since 0 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 ~~$16~~$16 million higher at September 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

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.

Product Warranty

We provide standard assurance-type warranties for our products, which cannot be purchased separately and do not meet the criteria to be considered a performance obligation. Warranty expense for the nine months ended September 30, ~~2020,~~2021, and accrued warranty cost, included in ~~“other accrued~~“accrued liabilities” in the ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, were as follows:


	Product
(In millions)	Warranties
Balance as of December 31, 2020	$	2.6
Warranty expense		0.2
Deductions and other		(0.3	)
Balance as of March 31, 2021	$	2.5
Warranty expense		(0.5	)
Deductions and other		(0.2	)
Balance as of June 30, 2021	$	1.8
Warranty expense		0.3
Deductions and other		(0.3	)
Balance as of September 30, 2021	$	1.8

Product

(In millions)

Warranties

Balance as of December 31, 2019

$
5.5

Warranty expense

1.3

Deductions and other

(2.3
)
Balance as of March 31, 2020

$
4.5

Warranty expense

—

Deductions and other

(1.5
)
Balance as of June 30, 2020

$
3.0

Warranty expense

0.4

Deductions and other

(0.4
)
Balance as of September 30, 2020

$
3.0

Note 13 — Other Operating Expense

We ~~took~~recognized restructuring charges of $0.8 million and $18.3 million for the quarter and nine months ended September 30, 2021, respectively, primarily related to severance and asset impairments. Anticipated future cash payments as of September 30, 2021 were $10.3 million. For the nine months ended September 30, 2021, other operating expenses also included a benefit related to the reduction of a contingent liability.

For the quarter ended September 30, 2020, we recognized a restructuring charge of ~~$15.8~~$15.8 million, ~~in the third quarter~~ of which ~~$9.4~~$9.4 million related to asset impairments ~~as part of~~for the planned closure of our Windsor, Colorado plant, and the remainder was ~~for severance costs~~primarily related to ~~additional~~severance due to job reductions. InFor the nine months ended 2020, other operating expense of ~~$43.6~~$43.6 million ~~included second quarter severance~~primarily related to costs ~~and costs related to~~associated with the terminated merger agreement with ~~Woodward. Anticipated future cash payments~~Woodward, Inc. as ~~of September 30, 2020 were $4.7 million.~~well as restructuring charges related to job reductions.


			Activity for the Quarter Ended September 30, 2021
	June 30,		Restructuring					Cash						September 30,
(In Millions)	2021		Charge		FX Impact			Paid			Non-Cash			2021
Employee termination	$	12.5	$	0.7	$	(0.3	)	$	(2.6	)	$	—		$	10.3
Impairment and other		—		0.1		0			(0.1	)		0			—
Total	$	12.5	$	0.8	$	(0.3	)	$	(2.7	)	$	0		$	10.3


			Activity for the Nine Months Ended September 30, 2021
	December 31,		Restructuring					Cash						September 30,
(In Millions)	2020		Charge		FX Impact			Paid			Non-Cash			2021
Employee termination	$	14.2	$	11.4	$	(0.6	)	$	(14.7	)	$	—		$	10.3
Impairment and other		—		6.9		0			(3.6	)		(3.3	)		—
Total	$	14.2	$	18.3	$	(0.6	)	$	(18.3	)	$	(3.3	)	$	10.3

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

Business Overview

We develop, manufacture, and market lightweight, high-performance structural materials, including carbon fibers, specialty reinforcements, prepregs and other fiber-reinforced matrix materials, honeycomb, adhesives, radio frequency / electromagnetic interference (“RF/EMI”) and microwave absorbing materials, 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, recreational products, and other industrial applications.

We serve international markets through manufacturing facilities, sales offices and representatives located in the Americas, Asia Pacific, Europe, ~~Russia,~~ India, and Africa. We also have a presence in Malaysia where we are ~~also~~ a partner in a joint venture ~~in Malaysia,~~ which manufactures composite structures for Commercial Aerospace applications.

We are a manufacturer of products within a single industry: Advanced Composites. We have two ~~segments,~~reportable segments: Composite Materials and Engineered Products. The Composite Materials segment is comprised of our carbon fiber, specialty reinforcements, ~~resins,~~resin systems, prepregs and other fiber-reinforced matrix materials, and honeycomb core product lines and pultruded profiles. The Engineered Products segment is comprised of lightweight ~~high-strength~~high strength composite structures, RF/EMI and microwave absorbing materials, engineered core and specialty machined honeycomb products with added ~~functionality.~~functionality and 3D thermoplastic printing.

On March 11, 2020, the World Health Organization ~~(“WHO”)~~ declared the COVID-19 outbreak a pandemic. The ~~outbreak~~pandemic has resulted in governments around the world implementing ~~increasingly~~ stringent measures to help control the spread of the virus, including quarantines, ~~“shelter in place” and “stay at home” orders,~~ travel restrictions, business curtailments, school closures, mandatory vaccinations and other measures. ~~In addition, governments and central banks in several parts~~While some of ~~the world~~these measures have ~~enacted fiscal and monetary stimulus measures to counteract~~been lightened or removed, the impacts of ~~COVID-19.~~the COVID-19 pandemic continue to be unpredictable and, in some cases, previously lifted measures have been reimplemented or new measures imposed as continued sporadic outbreaks of COVID-19 cases occur in various part of the world.

~~Our company is a sole provider for many programs, including critical defense programs. Consistent with national guidelines and with state and local orders to date,~~Since the pandemic began, we ~~are currently operating across our footprint with some temporary site closures. Notwithstanding our continued operations,~~have seen the impacts of COVID-19 ~~has had and may have further negative impacts~~ on our markets and operations, ~~supply chain, transportation networks~~including significant decreases in air traffic, temporary shutdowns of our customers’ and ~~customers, all of which have~~suppliers’ facilities and ~~may continue to compress~~decreased demand from our ~~margins, even after the preventative~~customers. In 2020 and precautionary measures that we, other businesses, and governments, are taking. The COVID-19 outbreak is a widespread public health crisis that is adversely affecting the economies and financial markets globally. The resulting economic downturn has, and could for an extended period of time, adversely affect demand for our products and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products, services and raw materials. The progression of the pandemic could also continue to negatively impact our business or results of operations through the ~~temporary closure~~first nine months of ~~our operating locations or those of our customers or suppliers.~~

~~During the third quarter of 2020,~~2021, our operations, margins and results were adversely impacted by lower demand for our products due to substantial reductions in original equipment manufacturer build rates combined with a move to reduce inventory throughout our supply chain, particularly carbon fiber. ~~Since the outbreak began, we~~The COVID-19 pandemic has had and may have ~~seen the~~further negative impacts ~~of COVID-19~~ on our ~~markets~~operations, supply chain, transportation networks and ~~operations including significant decreases in air traffic, temporary shutdowns~~customers, all of which may continue to compress our ~~customers’~~margins, even after the preventative and ~~suppliers’ facilities~~precautionary measures that we, other businesses and ~~decreased demand from our customers. In response, we~~governments have taken ~~certain mitigating actions~~and may take in the future. The COVID-19 pandemic is adversely affecting the economies and financial markets globally and has contributed to ~~align~~volatile supply and demand conditions affecting prices and volumes in the markets for our ~~costs with the lower sales~~products, services and ~~to preserve liquidity including eliminating approximately 30%~~raw materials, which could continue for an extended period of ~~our labor costs, curtailing discretionary spend, and suspending dividend payments and stock repurchases.~~ time.

The extent to which COVID-19 continues to adversely impact our business depends on future developments, ~~which are highly uncertain~~including availability of effective vaccines and ~~unpredictable, including~~medical treatments for all age groups and the rate of vaccinations and their effectiveness against new variants of COVID-19, as well as any other new information concerning the effectiveness of actions taken globally to contain or mitigate ~~its effects.~~the effects of COVID-19 and the emergence and impact of new variants of COVID-19. While we expect the pandemic to continue to negatively impact our results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the ~~related~~continuing financial impact to us cannot be reasonably estimated at this time.

On January 12, 2020, we announced that we had entered into an agreement and plan of merger (the “Merger Agreement”) with Woodward, Inc. (“Woodward”), which provided for the combination of Hexcel and Woodward in an all stock merger of equals (the “Merger”). In response to the impact of the COVID-19 pandemic, on April 5, 2020, Hexcel and Woodward entered into an agreement to terminate the Merger Agreement.

Net sales for the quarter were $286.9 million, 49.9% lower (49.7% in constant currency) than the $572.5 million reported for the third quarter of 2019. Declines in demand in the Commercial Aerospace and Industrial markets drove the decrease in sa~~les for the quarter.~~

Commercial Aerospace sales of $128.8 million decreased 66.6% (66.3% in constant currency) for the quarter as compared to the third quarter of 2019. Sales across all major programs were down substantially with the largest impact related to the A350. Boeing 737 MAX sales continue to be at a very low level. Build rate reductions driven by the COVID-19 pandemic combined with significant inventory destocking led to the reduced sales levels. Additional build rate reductions publicly announced at the end of July 2020 by two significant customers is further extending the destocking.

Sales to other commercial aerospace, which includes regional and business aircraft customers, were down 49.6% for the third quarter of 2020 as compared to 2019 as demand was negatively impacted by the global pandemic, particularly business jets.19

Space & Defense sales of $108.8 million decreased 0.9% (0.5% in constant currency) for the quarter as compared to the third quarter of 2019. The decrease was due to lower demand from a number of European space & defense programs as aggregate U.S. space & defense sales were up moderately in the third quarter of 2020 compared to the third quarter of 2019.

Total Industrial sales of $49.3 million for the third quarter of 2020 were down 35.8% (37.5% in constant currency) as compared to the 2019 period. Wind energy sales (the largest submarket in Industrial), experienced a decline of 40.4% compared to the third quarter of 2019. This reduction reflects a customer demand shift in the U.S. market. As a result of this demand change, Hexcel will close its wind energy prepreg production facility in Windsor, Colorado in early November 2020 that served the U.S. market. The Hexcel wind material prepreg production facility in Austria that serves the European market and the wind material facility in China, that serves the Asian market, continue to operate to produce materials for our wind energy customers.

Gross margin for the third quarter of 2020 decreased to 4.7% as compared to 27.6% for the third quarter of 2019. The deterioration reflects the under absorption of fixed overhead from lower sales levels magnified by the temporary idling of select production facilities during the period to align production with demand.

Selling, general and administrative and research and technology expenses for the third quarter of 2020 were 26% lower than the prior year as on-going realignment actions and headcount reductions reduce the cost structure. Other operating expense of $15.8 million, for the third quarter of 2020, primarily included the restructuring charge for the Windsor facility closure and additional severance costs across a number of facilities.

Operating cash flow for the first nine months of 2020 was $157.0 million compared to $277.3 million in 2019 on lower earnings partially offset by favorable working capital usage. For the first nine months of 2020, capital expenditures were $47.8 million as compared to $162.7 million in the first nine months of 2019. Free cash flow (defined as cash provided by operating activities less capital expenditures) for the nine months ended September 30, 2020 was a use of $109.2 million versus $114.6 million in the comparable period of 2019.

Financial Overview

Results of Operations


	Quarter Ended September 30,									Nine Months Ended September 30,									Quarter Ended September 30,									Nine Months Ended September 30,
(In millions, except per share data)	2020			2019			% Change			2020			2019			% Change			2021			2020			% Change			2021			2020			% Change
Net sales	$	286.9		$	572.5			(49.9	)%	$	1,206.6		$	1,791.4			(32.6	)%	$	333.8		$	286.9			16.3	%	$	964.4		$	1,206.6			(20.1	)%
Net sales change in constant currency								(49.7	)%								(32.6	)%								15.9	%								(21.1	)%
Operating income (loss)	$	(37.6	)	$	109.9			(134.2	)%	$	34.5		$	327.8			(89.5	)%	$	22.8		$	(37.6	)		160.6	%	$	28.8		$	34.5			(16.5	)%
As a percentage of net sales		(13.1	)%		19.2	%					2.9	%		18.3	%					6.8	%		(13.1	)%					3.0	%		2.9	%
Net income		9.7		80.3			N/M				51.1		233.4				(78.1	)%
Diluted net income per common share	$	0.12		$	0.93		N/M			$	0.61		$	2.71			(77.5	)%
Net income (loss)																				9.0			9.7			(7.2	)%		(2.8	)		51.1			(105.5	)%
Diluted net income (loss) per common share																			$	0.11		$	0.12			(8.3	)%	$	(0.03	)	$	0.61			(104.9	)%

The Company uses non-GAAP financial measures, including sales and expenses measured in constant dollars (prior year sales and expenses measured at current year exchange rates); operating income, ~~(loss),~~ net income ~~(loss)~~ and earnings ~~(loss)~~ per share adjusted for items included in operating expense and non-operating expenses; 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 can represent significant charges or credits that we believe 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 in isolation or as an alternative to or substitutes for GAAP measures of performance. Our calculation of these measures may not be comparable to similarly titled measures used by other companies, and the measures exclude financial information that some may consider important in evaluating our performance. Reconciliations to adjusted operating income, ~~(loss),~~ adjusted net income, ~~(loss),~~ adjusted diluted net income ~~(loss)~~ per share and free cash flow are provided below.


	Operating Income
	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2021		2020				2021		2020
GAAP operating income (loss)	$	22.8		$	(37.6	)	$	28.8	$	34.5
Other operating expense (a)		0.8			15.8			16.0		43.6
Adjusted operating income (loss) (non-GAAP)	$	23.6		$	(21.8	)	$	44.8	$	78.1


	Quarter Ended September 30,											Nine Months Ended September 30,
	2021					2020						2021						2020
(In millions, except per diluted share data)	Net Income		Diluted Net Income Per Share			Net (Loss) Income			Diluted Net (Loss) Income Per Share			Net (Loss) Income			Diluted Net (Loss) Income Per Share			Net Income (Loss)			Diluted Net Income (Loss) Per Share
GAAP net income (loss)	$	9.0		$	0.11	$	9.7		$	0.12		$	(2.8	)	$	(0.03	)	$	51.1		$	0.61
Other operating expense (a)		0.7			-		12.2			0.14			11.7			0.14			33.7			0.40
Tax expense (benefit) (b)		1.3			0.02		(46.2	)		(0.55	)		0.8			—			(48.9	)		(0.58	)
Adjusted net income (loss) (non-GAAP)	$	11.0		$	0.13	$	(24.3	)	$	(0.29	)	$	9.7		$	0.11		$	35.9		$	0.43

(a)

The quarter and nine months ended September 30, 2021 included restructuring costs primarily related to severance and the nine months ended September 30, 2021 also included a benefit related to the reduction of a contingent liability. The quarter and nine months ended September 30, 2020 included restructuring costs related to job reductions and the nine months ended September 30, 2020 also included costs related to the terminated merger with Woodward, Inc.

Operating Income (Loss)

Quarter Ended September 30,

Nine Months Ended September 30,

(In millions)

2020

2019

2020

2019

GAAP operating income (loss)

$
(37.6
)

$
109.9

$
34.5

$
327.8

Other operating expense (a)

15.8

—

43.6

—

Adjusted operating income (loss) (non-GAAP)

$
(21.8
)

$
109.9

$
78.1

$
327.8

(a) The quarter and nine months ended September 30, 2020 includes restructuring expenses as well as costs related to the terminated merger with Woodward.

(b)

The quarter ended September 30, 2021 included a discrete tax charge of $1.3 million related to the remeasurement of the net state deferred tax liabilities. The nine months ended September 30, 2021 included a net discrete tax charge of $0.8 million primarily resulting from the revaluation of U.S. and foreign deferred tax liabilities. The quarter and nine months ended September 30, 2020 included a $46.2 million benefit due to the release of a valuation allowance in a foreign jurisdiction due to a legal entity rationalization and treasury realignment initiative. The nine months ended September 30, 2020 also included a $2.7 million benefit for the release of reserves of unrecognized tax benefits as a result of tax audit settlements.

Quarter Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

(In millions, except per diluted share data)

Net Income (Loss)

EPS

Net Income

EPS

Net Income

EPS
Net Income

EPS

GAAP

$
9.7

$
0.12

$
80.3

$
0.93

$
51.1

$
0.61

$
233.4

$
2.71

Other operating expense (a)

12.2

0.14

—

—

33.7

0.40

—

—

Discrete tax benefit (b)

(46.2
)

(0.55
)

(3.0
)

(0.03
)

(48.9
)

(0.58
)

(3.0
)

(0.03
)
Adjusted (non-GAAP)

$
(24.3
)

$
(0.29
)

$
77.3

$
0.90

$
35.9

$
0.43

$
230.4

$
2.68

(a) The quarter and nine months ended September 30, 2020 included restructuring expenses as well as costs related to the terminated merger with Woodward.

(b) The quarter and nine months ended September 30, 2020 included a tax benefit primarily due to the release of a valuation allowance in a foreign jurisdiction.

Nine Months Ended September 30,

(In millions)

2020

2019

Net cash provided by operating activities

$
157.0

$
277.3

Less: Capital expenditures

(47.8
)

(162.7
)
Free cash flow (non-GAAP)

$
109.2

$
114.6


	Nine Months Ended September 30,
(In millions)	2021			2020
Net cash provided by operating activities	$	64.2		$	157.0
Less: Capital expenditures		(15.0	)		(47.8	)
Free cash flow (non-GAAP)	$	49.2		$	109.2

Net Sales

The following table summarizes net sales to third-party customers by segment and end market for the quarters and nine months ended September 30, ~~2020~~2021 and ~~2019:~~2020:


	Quarter Ended September 30,							Nine Months Ended September 30,							Quarter Ended September 30,							Nine Months Ended September 30,
(In millions)	2020		2019		% Change			2020		2019		% Change			2021		2020		% Change			2021		2020		% Change
Consolidated Net Sales	$	286.9	$	572.5		(49.9	)%	$	1,206.6	$	1,791.4		(32.6	)%	$	333.8	$	286.9		16.3	%	$	964.4	$	1,206.6		(20.1	)%
Commercial Aerospace		128.8		385.9		(66.6	)%		695.6		1,217.9		(42.9	)%		167.2		128.8		29.8	%		468.5		695.6		(32.6	)%
Space & Defense		108.8		109.8		(0.9	)%		328.8		329.4		(0.2	)%		110.4		108.8		1.5	%		329.0		328.8		0.1	%
Industrial	49.3			76.8		(35.8	)%	182.2		244.1			(25.4	)%		56.2		49.3		14.0	%		166.9		182.2		(8.4	)%

Composite Materials	$	215.7	$	448.0		(51.9	)%	$	960.4	$	1,419.7		(32.4	)%	$	254.1	$	215.7		17.8	%	$	732.2	$	960.4		(23.8	)%
Commercial Aerospace		95.6		294.5		(67.5	)%		567.6		941.6		(39.7	)%		125.6		95.6		31.4	%		354.5		567.6		(37.5	)%
Space & Defense		71.9		78.9		(8.9	)%		214.5		236.2		(9.2	)%		73.5		71.9		2.2	%		214.3		214.5		(0.1	)%
Industrial		48.2		74.6		(35.4	)%		178.3	241.9			(26.3	)%		55.0		48.2		14.1	%		163.4		178.3		(8.4	)%

Engineered Products	$	71.2	$	124.5		(42.8	)%	$	246.2	$	371.7		(33.8	)%	$	79.7	$	71.2		11.9	%	$	232.2	$	246.2		(5.7	)%
Commercial Aerospace	33.2		91.4			(63.7	)%		128.0	276.3			(53.7	)%		41.6		33.2		25.3	%		114.0		128.0		(10.9	)%
Space & Defense		36.9		30.9		19.4	%		114.3		93.2		22.6	%		36.9		36.9		—			114.7		114.3		0.3	%
Industrial		1.1		2.2		(50.0	)%		3.9		2.2		77.3	%		1.2		1.1		9.1	%		3.5		3.9		(10.3	)%

Sales by Segment

Composite Materials: Net sales of ~~$215.7~~$254.1 million in the third quarter of ~~2020 decreased $232.3~~2021 increased by $38.4 million from ~~the $448.0~~$215.7 million in ~~sales for~~ the prior year ~~quarter,~~quarter. The increase in sales was largely driven by ~~declines~~stronger narrowbody sales in Commercial Aerospace as well as an increase in Industrial sales, primarily in the automotive and ~~Industrial.~~recreation markets. Net sales of ~~$960.4~~$732.2 million for the first nine months of ~~2020~~2021 decreased ~~32.4%~~23.8% compared to the same period last ~~year. In Commercial Aerospace, there were significantly lower sales across all major programs~~year as ~~build rates across Commercial Aerospace have decreased significantly and rapidly in response to~~ the ~~COVID-19 pandemic compounded by extensive supply chain adjustments. The decline in Space & Defense sales was primarily related to lower military aircraft structure sales outside~~impact of the ~~Americas. The decline in Wind energy sales was primarily related to a shift in~~pandemic did not take effect until the ~~type~~second quarter of ~~product our customer demands in the U.S. market.~~ 2020.~~As a result of this demand change, Hexcel will close its wind energy prepreg production facility in Windsor, Colorado in early November 2020 that served the U.S. market.~~

Engineered Products: Net sales of $79.7 million for the third quarter of 2021 increased $8.5 million as compared to $71.2 million infor the third quarter of 2020 ~~decreased $53.3 million from the $124.5 million for 2019.~~due to an increase in Commercial Aerospace sales. Net sales of ~~$246.2~~$232.2 million for the first nine months of ~~2020~~2021 decreased ~~33.8%~~5.7% compared to the same period last year. ~~The declines primarily~~ ~~reflect lower sales for the Boeing 737 MAX~~ ~~as well as lower build rates across Commercial Aerospace in response to the COVID-19 pandemic.~~ ~~The increase in Space & Defense sales reflects the growth in U.S. military helicopter programs.~~

Sales by Market

Commercial Aerospace sales of ~~$128.8~~$167.2 million ~~decreased 66.6% (66.3%~~increased $38.4 million or 29.8% (also 29.8% in constant currency) for the third quarter of 2021 as compared to the third quarter of 2019. Sales across all major programs were down substantially with the largest impact related to the A350. Boeing 737 MAX sales continue to be at a very low level. Build rate reductions driven by the COVID-19 pandemic combined with significant inventory destocking led to the reduced sales levels. Additional build rate reductions publicly announced at the end of July 2020 ~~by two significant customers is further extending the destocking.~~ on stronger narrowbody sales.Sales of ~~$695.6~~$468.5 million for the first nine months of ~~2020,~~2021, decreased ~~42.9%~~32.6% (33.0% in constant currency) compared to the first nine months of ~~2019~~2020.Sales were higher in the prior year period as the impact of production cuts and destocking due to ~~significant production cuts across~~ the ~~major aircraft programs announced during~~pandemic did not begin to occur until the second ~~and third quarters~~quarter of ~~2020 and only limited sales for the Boeing 737 MAX program. The decline was compounded by significant destocking in the supply chain, which is amplified as build rates have moved even lower.~~2020.

Sales to ~~Other~~“Other Commercial Aerospace,” which ~~includes~~include regional and business aircraft, ~~customers, were down 49.6%~~increased by 9.4% for the third quarter of 2021 compared to the third quarter of 2020 primarily due to growth in business jet sales. Sales for the nine months ended September 30, 2021 decreased 28.6% as compared to ~~2019 due to significantly lower business jet demand and have declined 23.5% year to date.~~the same period in 2020.

Space & Defense sales of ~~$108.8~~$110.4 million ~~decreased 0.9% (0.5%~~increased 1.5% (1.4% in constant currency) for the third quarter of 2021 as compared to the third quarter of ~~2019~~. ~~The decrease was due to lower demand from a number of European space & defense programs as aggregate U.S. space & defense sales were up moderately~~2020 driven by strength in F-35, CH-53K, civil helicopters in Europe and unmanned aerial vehicles in the ~~third quarter~~U.S.Sales of ~~2020 compared to the third quarter of 2019. Space & Defense sales of $328.8~~$329.0 million for the first nine months of ~~2020,~~2021 were unchanged (0.8% lower in ~~line with~~constant currency) compared to the first nine months of ~~2019.~~2020.

Total Industrial sales ~~of $49.3 million for~~in the third quarter of ~~2020 were down 35.8% (37.5%~~2021 of $56.2 million increased 14.0 % (11.7% in constant currency) as compared to the ~~2019 period~~third quarter of 2020. Strength in automotive and recreation markets as well as sales growth supported by actions to direct carbon fiber

~~decreased 25.4% for the first nine months as compared~~

to ~~last year.~~ other industrial markets offset lower wind energy sales.Wind energy sales (the largest submarket in Industrial), experienced a decline of ~~40.4%~~29.8% (31.6% in constant currency) during the third quarter of 2021 compared to the third quarter of ~~2019. The reduction reflects a customer demand shift~~2020 due to cessation of sales in North America and subdued demand. Total Industrial sales of $166.9 million for the ~~U.S. market. As a result of this demand change, Hexcel will close its wind energy prepreg production facility~~nine months ended September 30, 2021 decreased 8.4% (12.4% in Windsor, Colorado in early November 2020 that served the U.S. market. The Hexcel wind material prepreg production facility in Austria that serves the European market and the wind material facility in China that serves the Asian market continueconstant currency) compared to ~~operate to produce materials for our wind energy customers. Wind energy sales experienced a decline of 25.8% for~~ the first nine months of ~~2020 as~~2020.For the first nine months of 2021, wind energy sales decreased 37.6% (40.3% in constant currency) compared to the same period last year reflecting lower demand and the cessation of sales in ~~2019 due to production disruptions caused by the pandemic and lower customer demand, specifically in the U.S.~~North America.

Gross Margin


	Quarter Ended September 30,									Nine Months Ended September 30,									Quarter Ended September 30,									Nine Months Ended September 30,
(In millions)	2020			2019			% Change			2020			2019			% Change			2021			2020			% Change			2021			2020			% Change
Gross margin	$	13.5		$	157.9			(91.5	)%	$	209.3		$	493.9			(57.6	)%	$	66.0		$	13.5			388.9	%	$	181.0		$	209.3			(13.5	)%
Percentage of sales		4.7	%		27.6	%					17.3	%		27.6	%					19.8	%		4.7	%					18.8	%		17.3	%

Gross margin for the third quarter of 2021 and 2020 ~~declined to~~was 19.8% and 4.7% ~~compared to 27.6%~~, respectively. The improvement in the third quarter of ~~2019 and~~2021 compared to the same period last year was ~~17.3% and 27.6%~~due to a favorable sales mix oriented towards carbon fiber combined with the benefits of prior cost reduction actions that reduced the overhead cost base. Gross margin for the first nine months of 2021 and 2020 was 18.8% and ~~2019,~~17.3%, respectively. ~~The dramatic reduction in demand combined with the unfavorable mix impact of lower carbon fiber sales drove the decline in margin performance in 2020.~~

Operating Expenses


	Quarter Ended September 30,									Nine Months Ended September 30,									Quarter Ended September 30,									Nine Months Ended September 30,
(In millions)	2020			2019			% Change			2020			2019			% Change			2021			2020			% Change			2021			2020			% Change
SG&A expense	$	24.6		$	33.8			(27.2	)%	$	95.2		$	122.8			(22.5	)%	$	32.0		$	24.6			30.1	%	$	102.7		$	95.2			7.9	%
Percentage of sales		8.6	%		5.9	%					7.9	%		6.9	%					9.6	%		8.6	%					10.6	%		7.9	%

R&T expense	$	10.7		$	14.2			(24.6	)%	$	36.0		$	43.3			(16.9	)%	$	10.4		$	10.7			(2.8	)%	$	33.5		$	36.0			(6.9	)%
Percentage of sales		3.7	%		2.5	%					3.0	%		2.4	%					3.1	%		3.7	%					3.5	%		3.0	%

Selling, general and administrative and research and technology expenses were ~~lower,~~higher for both the quarter and nine month periods ended September 30, 2020, than the prior year’s comparable periods, as cost reduction actions began to take effect, including headcount reductions and minimizing discretionary spending.

~~Operating Income (Loss)~~

Quarter Ended September 30,

Nine Months Ended September 30,

(In millions)

2020

2019

% Change

2020

2019

% Change

Consolidated operating income (loss)

$
(37.6
)

$
109.9

(134.2
)%

$
34.5

$
327.8

(89.5
)%
Operating margin

(13.1
)%

19.2
%

2.9
%

18.3
%

Composite Materials

(36.6
)

100.1

(136.6
)%

75.0

324.4

(76.9
)%
Operating margin

(16.4
)%

21.2
%

7.4
%

21.9
%

Engineered Products

(2.7
)

20.3

(113.3
)%

3.3

51.4

(93.6
)%
Operating margin

(3.8
)%

16.3
%

1.3
%

13.8
%

Corporate & Other

1.7

(10.5
)

(116.2
)%

(43.8
)

(48.0
)

(8.8
)%

We had an operating loss of $37.6 million for the third quarter of 2020 compared to income of $109.9 million for the third quarter of 2019. Operating income for the first nine months of 2020 and 2019 was $34.5 million and $327.8 million, respectively. The three and nine month periods ended September 30, 2020 included $15.8 million and $43.6 million, respectively, of other operating expense primarily related to restructuring charges and costs related to the Merger. In 2020, operating margins were negatively impacted by the dramatic reduction in demand for our products and the margin mix impact of lower carbon fiber sales.

~~Interest Expense, Net~~

Quarter Ended September 30,

Nine Months Ended September 30,

(In millions)

2020

2019

% Change

2020

2019

% Change

Interest expense, net

$
9.7

$
11.0

(11.8
)%

$
32.4

$
34.9

(7.2
)%

~~Interest expense for~~ the third quarter and nine months ended September 30, ~~2020 was lower due to lower effective interest rates, when~~2021 compared to the same periods in 2020, primarily due an increase in employee-related costs as the prior year period included benefits from lower stock compensation expense and temporary salary reductions.

Operating Income


	Quarter Ended September 30,									Nine Months Ended September 30,
(In millions)	2021			2020			% Change			2021			2020			% Change
Consolidated operating income (loss)	$	22.8		$	(37.6	)		160.6	%	$	28.8		$	34.5			(16.5	)%
Operating margin		6.8	%		(13.1	)%					3.0	%		2.9	%
Composite Materials		30.0			(36.6	)		182.0	%		61.9			75.0			(17.5	)%
Operating margin		11.1	%		(16.4	)%					8.0	%		7.4	%
Engineered Products		6.5			(2.7	)		340.7	%		17.1			3.3			418.2	%
Operating margin		8.1	%		(3.8	)%	��				7.3	%		1.3	%
Corporate & Other		(13.7	)		1.7		N/M				(50.2	)		(43.8	)		(14.6	)%

Operating income (loss) for the third quarters of 2021 and 2020 was $22.8 million and $(37.6) million, respectively. The increase in operating income for the third quarter of 2021 over the same period last ~~year.~~year was primarily driven by strong gross margins, resulting from favorable sales mix and a reduction in the overhead cost base, as well as lower severance costs. Operating income for the first nine months of 2021 and 2020 was $28.8 million and $34.5 million, respectively. The decrease in operating income for the nine months ended September 30, 2021 as compared to the same period last year was largely due to lower gross margins resulting from a pandemic-related decline in sales partially offset by lower other operating expenses due to lower severance in 2021 and costs incurred in 2020 related to the terminated merger with Woodward, Inc.

Interest Expense, Net


	Quarter Ended September 30,							Nine Months Ended September 30,
(In millions)	2021		2020		% Change			2021		2020		% Change
Interest expense, net	$	9.5	$	9.7		(2.1	)%	$	29.1	$	32.4		(10.2	)%

Interest expense for the third quarter ended September 30, 2021 was slightly lower compared to the third quarter of 2020 and interest expense for the nine months ended September 30, 2021 was lower compared to the same period last year primarily due to lower average debt levels.

Provision for ~~(Benefit from)~~ Income Taxes


	Quarter Ended September 30,						Nine Months Ended September 30,						Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2020			2019			2020			2019			2021			2020			2021		2020
Income tax (benefit) expense	$	(56.9	)	$	18.2		$	(48.7	)	$	62.4
Income tax expense (benefit)													$	5.1		$	(56.9	)	$	1.6	$	(48.7	)
Effective tax rate	N/M				18.4	%	N/M				21.3	%		38.3	%	N/M			N/M		N/M

The effective tax rate for the quarter ended September 30, 2021 was 38.3% and included a discrete tax charge of $1.3 million related to the remeasurement of the net state deferred tax liabilities. The tax ~~provision~~expense for the ~~current~~nine months ended September 30, 2021 was $1.6 million and included a net discrete tax charge of $0.8 million resulting from the revaluation of U.S. and foreign deferred tax liabilities. The tax benefit for the quarter ended September 30, 2020 was $56.9 million and included a $46.2 million benefit primarily due to the release of a valuation allowance in a foreign ~~jurisdiction.~~ jurisdiction due to a legal entity rationalization and treasury realignment initiative. The tax ~~provision~~benefit of $48.7 million for the first nine months of 2020 also included a $2.7 million benefit ~~primarily~~ for the release of reserves of unrecognized tax benefits as a result of tax audit settlements. ~~The three months and first nine months ended~~

Financial Condition

Liquidity: Cash on hand at September 30, ~~2019 included a $3.0~~2021 was $105.8 million ~~benefit primarily due~~as compared to ~~tax credits identified in the quarter. Given the adverse impact of COVID-19 on our earnings the effective tax rate in 2020 is not meaningful.~~

~~Financial Condition~~

~~Liquidity:~~ $103.3 million at December 31, 2020.As of September 30, ~~2020, our~~2021, total debt ~~net of cash,~~ was ~~$931.2~~$877.3 million as compared to ~~$995.7~~$926.4 million at December 31, ~~2019. At~~2020.

In September 2020, we amended our Facility to allow for relief from certain terms, including adjusting the maximum leverage ratio covenant for a defined period. On January 28, 2021, we entered into the Second Amendment, which further amended the Facility agreement to provide that, from January 28, 2021 through and including March 31, 2022, we will not be subject to a maximum leverage ratio covenant but will instead be required to maintain Liquidity (as defined in the Facility agreement) of at least $250 million. Additionally, during such period, the Company will be subject to limitations on share repurchases, cash dividends, and its ability to incur secured debt, in each case subject to certain exceptions; the applicable margin and commitment fees are increased; the incremental facility will not be available; and if the Company’s public debt rating is downgraded to (i) BB or lower by Standard & Poor’s and (ii) Ba2 or lower by Moody’s, we will be required to grant liens on certain of our assets, which liens will be released upon the Company’s public debt rating being upgraded to BB+ or higher by Standard & Poor’s or Ba1 or higher by Moody’s. The Company’s public debt rating as of September 30, ~~2020,~~2021 is BB+/Baa3. In addition, the Second Amendment provides that the Company will not be subject to an interest coverage ratio covenant until the test period ending December 31, 2021 and revolving commitments under the Facility were reduced to $750 million. In connection with the Second Amendment, we accelerated a portion of the deferred financing costs and recognized $0.9 million in interest expense during the first quarter of 2021. As of September 30, 2021, we were in compliance with all debt covenants.

As of September 30, 2021, total borrowings under ~~our $1 billion Senior Unsecured Revolving Credit~~the Facility ~~(the~~

~~“Facility”)~~ were ~~$302 million.~~$179.0 million, which approximated fair value. The Facility agreement permits us to issue letters of credit up to an aggregate amount of ~~$50.0~~$50 million. ~~Any outstanding~~Outstanding letters of credit reduce the amount available for borrowing under the Facility. As of September 30, ~~2020, we had not~~2021, there were no issued ~~any~~ letters of credit under the Facility, resulting in undrawn availability under the Facility of ~~$698 million, subject to ongoing covenant compliance.~~

$571 million. The Facility agreement contains financial and other covenants, including, but not limited customary restrictions on the incurrence of debt by our subsidiaries and the granting of liens, as well as the maintenance of anweighted average interest coverage ratio and a leverage ratio. As defined in the Facility agreement, we are required to maintain a minimum interest coverage ratio of 3.50 (based on the ratio of EBITDA to interest expense) and may not exceed a maximum leverage ratio of 3.75 (based on the ratio of total debt to EBITDA) with a step up to 4.25 allowed following certain acquisitions. In addition, the Facility agreement contains other customary terms and conditions such as representations and warranties, additional covenants and events of default. As detailed in Note 5 to the condensed consolidated financial statementsrate for the Facility was ~~amended in September 2020 to provide~~4.16% for ~~a Covenant Relief Period from October 1, 2020 through and including~~the nine months ended September 30, 2021.

We expect to meet our short-term liquidity requirements (including capital expenditures) through net cash from operating activities, cash on hand and the Facility. As of September 30, ~~2020,~~2021, 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 2024 when the Facility expires.

Earlier this year, the Company applied for the Aviation Manufacturing Jobs Protection ("AMJP") program, created under the American Rescue Plan Act of 2021, which provides funding to eligible businesses to pay up to half of their compensation costs for certain categories of employees, for up to six months. To qualify for funding, eligible companies must have involuntarily furloughed or laid off at least 10% of its U.S. workforce or have experienced at least a 15% decline in 2020 global operating revenue. In September, the U.S. Department of Transportation announced that it had approved for the Company to receive up to $20.9 million

under the AMJP program. The Company anticipates receiving approximately half of the offered funds in the fourth quarter of 2021 and the remaining funds in 2022.

Operating Activities:Net cash provided by operating activities for the first nine months of 2021 was $64.2 million compared to $157.0 million for the same period last year. Working capital was a cash use of $46.0 million for the first nine months of ~~2020~~2021 compared to ~~$277.3~~a source of $28.7 million in the ~~2019~~same period ~~on lower earnings partially offset by favorable working capital usage. Working capital generated $28.7 million~~ in ~~2020 as compared to a use of $83.7 million in 2019.~~2020.

Investing Activities: Net cash used for investing activities was ~~$47.8~~$15.0 million and ~~$325.9~~$47.8 million in the first nine months of 2021 and 2020, ~~and 2019, respectively. The 2019 period included $163.2 million for the ARC Technologies, Inc. (“ARC”) acquisition. Capital expenditures were $47.8 million and $162.7 million~~respectively, reflecting a decline in ~~2020 and 2019, respectively.~~capital expenditures.

Financing Activities: Financing activities used ~~$106.9~~$44.8 million of cash in the first nine months of ~~2020 and provided $64.8~~2021 compared to $106.9 million in the same period in ~~2019. The 2019 period included amounts borrowed from~~2020. In response to the impacts of the COVID-19 pandemic, we announced in the early part of 2020 that we had suspended our dividend payments and stock repurchases. During the third quarter ended September 30, 2020, we repaid $266 million under our Facility although borrowings were higher in 2020 as they included the remaining $125 million of our initial exceptional drawdown of $250 million, which we chose to ~~fund~~draw down as we focused on preserving cash during our initial response to the ~~ARC acquisition.~~COVID-19 pandemic. In addition, in January 2020, the Company used $49.9 million to repay and terminate ~~the~~its Euro term loan. We also returned $38.8 million to stockholders ~~from~~in the form of stock repurchases and dividends in the first ~~nine months~~half of ~~2020 compared to $106.8 million in 2019.~~2020.

~~In response to the COVID-19 pandemic we announced that we have suspended our dividend payments and stock repurchases.~~

Financial Obligations and Commitments: The next significant scheduled debt maturity will not occur until 2024, when the Facility matures. Certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases.

Critical Accounting Estimates

Our ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors management believes to be relevant at the time our ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements are prepared. On a regular basis, management reviews accounting policies, assumptions, estimates and judgments to ensure our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results may differ from our assumptions and estimates, and such differences could be material.

We describe our significant accounting policies and critical accounting estimates in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019.~~2020.

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 and health and safety matters. We estimate and accrue our liabilities resulting from such matters based upon 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. We believe we have adequately accrued for these potential liabilities; however, facts and circumstances may change, such as new developments, or a change in approach, including a change in settlement strategy or in an environmental

remediation plan, that could cause the actual liability to exceed the estimates, or may require adjustments to the recorded liability balances in the future. For further discussion, see Note 12, Commitments and Contingencies, to the accompanying Condensed Consolidated Financial Statements of this Form 10-Q.

Our estimate of liability as a potentially responsible party and our remaining costs associated with our responsibility to remediate the Lower Passaic River in New Jersey and other sites are accrued in the condensed consolidated balance sheets. As of September 30, 2020, our aggregate environmental related accruals were $2.5 million, of which $0.6 million was included in accrued liabilities, with the remainder included in non-current liabilities. As related to certain environmental matters, the accrual was 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 at the high end of the range of possible outcomes, for those sites where we are able to estimate our liability, our accrual would have been approximately $16 million higher. 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, the amount of insurance coverage and other actions by governmental agencies or private parties, or the impact, if any, of being named in a new matter.

Forward-Looking Statements

This report contains 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,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “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 provided by Airbus, Boeing and others; (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 have been completed; (d) expectations with regard to the build rate ~~and return to service~~ of the Boeing 737 MAX following its return to service and the related impact on our revenues; (e) expectations with regard to the timing of inventory destocking resulting from the pandemic-induced decrease in customer demand; (f) expectations with regard to raw material cost and availability; (g) expectations of composite content on new commercial aircraft programs and our share of those requirements; ~~(f)~~(h) expectations regarding revenues ~~for~~from space and defense applications, including whether certain programs might be curtailed or discontinued; ~~(g)~~(i) expectations regarding sales for wind energy, recreation, automotive and other industrial applications; ~~(h)~~(j) expectations regarding working capital trends and expenditures and inventory levels; ~~(i)~~(k) expectations as to the level of capital expenditures and ~~when we will complete the construction~~completion of capacity expansions and qualification of new products; ~~(j)~~(l) expectations regarding our ability to maintain and improve ~~margins in view of the current economic environment; (k)~~margins; (m) expectations regarding the outcome of legal matters or the impact of changes in laws or ~~regulations; (l)~~regulations or government policies; (n) our projections regarding our tax rate; ~~(m)~~(o) expectations with regard to the ~~anticipated~~continued impact of the COVID-19 pandemic on worldwide air travel and aircraft programs, as well as on our customers and suppliers and, in turn, on our operations and financial results; and ~~(n)~~(p) the anticipated impact of the above factors and various market risks on our expectations of financial results for ~~2020~~2021 and beyond.

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: the impact of the COVID-19 pandemic ~~including~~(including continued disruption in global financial markets, ongoing restrictions on movement and travel, employee absenteeism and reduced ~~consumer~~ demand for air ~~travel,~~travel) on the operations, business and financial condition of Hexcel and its customers and suppliers; reductions in sales to any significant customers, particularly Airbus ~~Boeing~~ or ~~Vestas,~~Boeing, including reduction in revenue related to ~~a prolonged suspension~~the timing of ramp-up of production of the Boeing 737 MAX, as well as due to the impact of the COVID-19 pandemic; ~~inability~~our ability to effectively adjust production and inventory levels to align with ~~reduced~~customer demand; inability to effectively motivate, retain and ~~retain~~hire necessary workforce; our ability to successfully implement or realize our business strategies, plans and objectives of management, including any restructuring or alignment activities in which we may engage; the impact of any government mandated COVID-19 precautions, including mandatory vaccination; timing of inventory destocking caused by the COVID-19 pandemic; changes in sales mix; changes in current pricing and cost levels; changes in aerospace delivery rates; changes in government defense procurement budgets; changes in military aerospace program technology; timely new product development or introduction; industry capacity; increased competition; availability and cost of raw materials; supply chain disruptions; ~~inability~~our ability to install, staff and qualify necessary capacity or complete ~~planned manufacturing improvements~~capacity expansions to meet customer demand; cybersecurity breaches or intrusions; currency exchange rate fluctuations; changes in ~~global~~ political, social and economic conditions, including, but not limited to, the effect of change in global trade policies and the impact of the exit of the U.K. from the European Union; work stoppages or other labor disruptions; our ability to successfully complete any strategic acquisitions, investments or dispositions; compliance with environmental, health, safety and other related laws and regulations, including those related to climate change; and the unexpected outcome of legal matters or impact of changes in laws or regulations.

Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements. As a result, the foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports we file with the SEC. For additional information regarding certain

factors that may cause our actual results to differ from those expected or anticipated, see the information under the caption “Risk Factors” which is located in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019,~~2020, as well as in Item 1A. “Risk Factors” of this Form 10-Q. We do not undertake anany obligation to update our forward-looking statements or risk factors to reflect future events or circumstances, except as otherwise required by law.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Except for the continued broad effects of COVID-19 ~~as a result of its negative impact~~ on ~~the global economy and major financial markets,~~ market risk, there have been no material changes in our market risk from the information provided in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of September 30, ~~2020,~~2021, and with the participation of the Company's management have concluded that these disclosure controls and procedures ~~are~~were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to

ensure that information required to be disclosed by us in the reports we file or submit, is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Our Chief Executive Officer and Chief Financial Officer have concluded that there have not been any changes in our internal control over financial reporting during the three months ended September 30, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The information required by Item 1 is contained within Note 12 on pages 16 through 1817 of this Form 10-Q and is incorporated herein by reference.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, which could materially affect our business, financial condition or future results. There have been no material changes in the Company’s risk factors from the aforementioned 10-K, except as set forth in the below risk factor, and ~~that, due to the termination of the Merger Agreement,~~ the risk ~~factors set forth~~factor entitled “The short-term rights agreement that we entered into in ~~the Form 10-K under “Risks Relating~~2020 could discourage third parties from seeking strategic transactions with us that could be beneficial to ~~the Proposed Merger with Woodward” are~~our stockholders.” is no longer ~~applicable.~~ applicable as our stockholder rights plan expired on April 6, 2021.

Our business has been and will continue to be adversely affected by the COVID-19 pandemic. The full extent to which the COVID-19 pandemic will adversely impact our business, financial condition and results of operations is highly uncertain and cannot be predicted.

In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a pandemic. The COVID-19 pandemic has created significant uncertainty and economic ~~disruption.~~disruption and has negatively affected the business and results of operations for the Company. We have taken steps to align our business with the unfavorable economic conditions, including headcount reductions, reductions in employee hours, and/or furloughs, at many of our sites. Given the ongoing and dynamic nature of the ~~circumstances,~~pandemic, it is difficult to predict the full extent of the adverse impact of the COVID-19 pandemic on our business, and there is no guarantee our efforts to address the adverse impacts of COVID-19 will be effective.

We have experienced lower demand and operational interruptions as a result of COVID-19, including the temporary suspension of operations due to the inability to staff facilities or government-imposed restrictions, which has had an adverse effect on the productivity and profitability of such manufacturing facilities, and in turn an adverse effect on our business and operations. While most of our manufacturing sites are currently in operation, we have reduced or furloughed certain operations in response to government measures, employee welfare concerns and the impact of COVID-19 on the global demand and supply chain. Our manufacturing operations may be further adversely affected by impacts from COVID-19 including, among other things, additional government actions and other responsive measures, further decreases in demand and/or deeper supply chain disruptions, and health and availability of essential onsite

personnel.personnel. To comply with local regulations and ensure workplace safety, enhanced cleaning and sanitation procedures and protocols for the use of personal protective equipment have been instituted, as well as work cell zoning to ensure social distancing, for those sites that remain operational.

~~In addition, several countries, including the United States, have taken steps~~

We are heavily dependent on sales to ~~restrict air travel, and many companies have adopted policies prohibiting non-essential business travel by their employees. Even~~customers in the ~~absence~~aerospace industry, which has been materially negatively impacted by the COVID-19 pandemic. Approximately 55% of ~~formal restrictions and prohibitions, contagious illness and fear of contagion adversely affects travel behavior. Approximately 68% of~~ our ~~net~~ sales for fiscal year ended December 31, ~~2019~~2020 were derived from sales to Commercial Aerospace customers, which included ~~87%~~84% from Airbus and Boeing aircraft, and ~~13%~~16% from regional and business aircraft. ~~Current travel~~Travel restrictions, as well as changes in the propensity for the general public to travel by air as a result of the COVID-19 pandemic, ~~has~~have caused reductions in demand for commercial aircraft, which has had an adverse impact our ~~net~~ sales and operating results and may continue to do so for an extended period of time. While we are unable to predict the magnitude and duration of such and impact at this time, the further loss of, or significant reduction in, purchases by Airbus or Boeing will materially impair our business, operating results, prospects, and financial condition.

Furthermore, the COVID-19 pandemic has resulted in market volatility, which ~~has~~ caused a ~~precipitous~~significant decline in our stock price, subjecting us to increased takeover risk, impaired our ability to declare dividends or other distributions and conduct share buybacks, and may impact our ability to comply with the covenants contained in the agreements that govern our indebtedness and raise additional funds when and as needed. We may also incur additional costs to remedy damages caused by business disruptions,

performance delays or interruptions, payment defaults or bankruptcy of our third-party customers and suppliers, which could ~~adversely affect~~lead to additional charges, impairments, and other adverse financial impacts.

On September 9, 2021, President Biden directed the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) to issue an Emergency Temporary Standard (“ETS”) requiring that all employers with at least 100 employees ensure that their employees are fully vaccinated for COVID-19 or obtain a negative COVID-19 test at least once a week. President Biden also issued an Executive Orderrequiring certain COVID-19 precautions for government contractors and their subcontractors, including mandatory employee vaccination (subject to medical and religious exemptions). It is not currently possible to predict with any certainty the exact impact on the Company of the OSHA ETS, which has not yet been issued, or the requirements for government contractors and their subcontractors. Any requirement to mandate COVID-19 vaccination of our workforce or require our unvaccinated employees to be tested weekly could result in employee attrition and difficulty securing future labor needs and may have an adverse effect on future profit margins. In addition, any requirement to impose obligations on our suppliers under the Executive Order covering government contractors and their subcontractors could impact the price and continuity of supply of raw materials and our results of operations and financial condition ~~and results of operations.~~could be adversely affected.

To the extent the COVID-19 pandemic or any worsening of the global business and economic environment as a result thereof adversely affects our business and financial results, it may also have the effect of heightening or exacerbating many of the other risks described in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2019, such as those relating to the cyclical nature of the markets in which we operate, our ability to maintain manufacturing efficiency, disruption of our operations at our manufacturing facilities or in our supply chain, cybersecurity threats and risks generally associated with international business operations.

~~Due to the evolving and highly uncertain nature of this event, we~~We cannot predict at this time the full extent to which the COVID-19 pandemic will adversely impact our business, results, and financial condition, which will depend on many factors that are not known at this ~~time.~~time, as the situation is unprecedented and continues to evolve. These include, among others, the extent of harm to public health, including the ~~continued~~duration of the pandemic, any potential subsequent waves of COVID-19 infection, the emergence of new variants of COVID-19, which may be more transmissible or virulent than the initial strain, the availability of effective vaccines and medical treatments for all age groups and the rate of vaccinations, further disruption to the manufacturing of and demand for our products, our ability to effectively manage raw material supply and inventory levels and to adjust our production schedules to align with ~~reduced~~changing demand, potential future restructuring ~~impairment~~actions, impairments and other charges, the impact of the global business and economic environment on liquidity and the availability of capital, the costs incurred to keep our employees safe and comply with government requirements while maintaining continued operations, and our ability to effectively motivate and retain the necessary workforce. ~~We are staying in close communication with~~Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our manufacturing facilities, employees, customers, and suppliers, and acting to mitigate the impact of this dynamic and evolving situation through cost-savings and other measures, which may not be successful and are subject to the factors described above, many of which are uncertain or outside of our control.

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

~~During the third quarter of 2020 we did not repurchase any shares of outstanding common stock. We suspended our share repurchase program for the second and third quarters of 2020~~business as a result of its global economic impact and the ~~impacts~~impact on air travel.

In addition to the foregoing, many of the risk factors disclosed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K have been, and we anticipate will continue to be further, heightened or exacerbated by the impact of the COVID-19 pandemic and we have limitations on share repurchases through September 2021 under the amended Facility. The Company still has $217.2 million available under the $500 million stock repurchase program that our Board announced on May 7, 2018.pandemic.

ITEMS 2, 3, 4 and 5 are not applicable, and therefore have been omitted.

ITEM 6. Exhibits

EXHIBIT INDEX


Exhibit No.		Description
10.1


~~3.1~~		~~Certificate of Designations of Series A Junior Participating Preferred Stock of~~Amendment No. 2 to the Supplemental Executive Retirement Agreement dated October 28, 2009, between Nick L. Stanage and Hexcel Corporation, ~~as filed with the Secretary of the State of Delaware on April 6, 2020~~effective July 26, 2021 (incorporated herein by reference to Exhibit ~~3.1~~10.2 to the Company’s ~~Current~~Quarterly Report on Form ~~8-K dated April 6, 2020)~~10-Q for the quarter ended June 30, 2021).*
31.1
~~4.1~~		Rights Agreement, dated as of April 6, 2020, between Hexcel Corporation and American Stock Transfer & Trust Company, LLC, which includes the form of Certificate of Designations as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated April 6, 2020).

~~10.1~~		Mutual Termination Agreement, dated as of April 5, 2020, between Hexcel Corporation, Woodward, Inc. and Genesis Merger Sub, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 6, 2020).

~~10.2~~		First Amendment to Credit Agreement, dated as of September 28, 2020, by and among Hexcel Corporation, the lenders party thereto, and Citizens Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 28, 2020).

~~31.1~~		Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
~~31.2~~		Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002 (furnished herewith)

~~101.INS~~101			The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline ~~XBRL Instance Document: The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements.

~~101.SCH~~	104	~~Inline XBRL Taxonomy Extension Schema~~

~~101.CAL~~		~~Inline XBRL Taxonomy Extension Calculation Linkbase~~

~~101.DEF~~		~~Inline XBRL Taxonomy Extension Definition Linkbase~~

~~101.LAB~~		~~Inline XBRL Taxonomy Extension Label Linkbase~~

~~101.PRE~~		~~Inline XBRL Taxonomy Extension Presentation Linkbase~~

~~104~~		Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101.

~~Signature~~* Indicates management contract or compensatory plan or arrangement

Signature

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


		Hexcel Corporation

October ~~19, 2020~~18, 2021		/s/ ~~Kimberly Hendricks~~Amy S. Evans
(Date)		~~Kimberly Hendricks~~Amy S. Evans
		Senior Vice President, ~~Corporate Controller and~~
		Chief Accounting Officer ~~(on behalf of the registrant and as the~~ ~~registrant’s Principal Accounting Officer)~~

3029


Delaware		94-1109521
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


Large accelerated filer☒		Accelerated filer 
Non-accelerated filer 		Smaller reporting company ☐

~~Non-accelerated filer~~ Emerging growth company ☐		~~Smaller reporting company~~ ☐

		~~Emerging growth company~~ ☐


Class		Outstanding at October ~~15, 2020~~14, 2021
COMMON STOCK		~~83,535,720~~83,894,367


			Page
PART I.	FINANCIAL INFORMATION		3

ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)		3

	•	Condensed Consolidated Balance Sheets — September 30, ~~2020~~2021 and December 31, ~~2019~~ 2020	3

	•	Condensed Consolidated Statements of Operations — The quarter and nine months ended September 30, ~~2020~~2021 and ~~2019~~ 2020	4

	•	Condensed Consolidated Statements of Comprehensive Income (Loss) — The quarter and nine months ended September 30, ~~2020~~2021 and ~~2019~~ 2020	4

	•	Condensed Consolidated Statements of Cash Flows — The nine months ended September 30, ~~2020~~2021 and ~~2019~~ 2020	5

	•	Condensed Consolidated Statements of Stockholders’ Equity — The quarter and nine months ended September 30, ~~2020~~2021 and ~~2019~~ 2020	6

	•	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		2625

ITEM 4.	Controls and Procedures		2625

PART II.	OTHER INFORMATION		26

ITEM 1.	Legal Proceedings		26

ITEM 1A.	Risk Factors		26

ITEM 2.6.	~~Unregistered Sales of Equity Securities and Use of Proceeds~~		28

~~ITEM 6.~~	Exhibits		2928

	SIGNATURE		3029

	(Unaudited)
	September 30,			December 31,
(In millions)	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	68.0		$	64.4
Accounts receivable, net		149.9		227.6
Inventories, net		262.9		333.1
Contract assets		48.9		52.7
Prepaid expenses and other current assets		46.1		27.1
Total current assets		575.8			704.9

Property, plant and equipment		3,103.3			3,075.1
Less accumulated depreciation		(1,226.0	)		(1,132.3	)
Net property, plant and equipment		1,877.3			1,942.8

Goodwill and other intangible assets, net		276.6		280.4
Investments in affiliated companies		45.7		46.5
Other assets		196.7			154.0
Total assets	$	2,972.1		$	3,128.6

Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings	$	0.5		$	9.5
Accounts payable		61.1		157.6
Accrued compensation and benefits		48.3		74.4
Accrued liabilities		65.6		81.1
Total current liabilities		175.5		322.6
Commitments and contingencies (see Note 12)
Long-term debt		998.7			1,050.6
Retirement obligations		55.5			53.3
Other non-current liabilities		243.0			256.0
Total liabilities		1,472.7			1,682.5
Stockholders' equity:
Common stock, $0.01 par value, 200.0 shares authorized, 109.6 shares and 109.3 shares issued at September 30, 2020 and December 31, 2019, respectively		1.1			1.1
Additional paid-in capital		845.1			829.9
Retained earnings		2,015.8			1,978.9
Accumulated other comprehensive loss		(85.2	)		(118.7	)
		2,776.8			2,691.2
Less – Treasury stock, at cost, 26.1 shares at September 30, 2020 and 25.7 shares at December 31, 2019, respectively.		(1,277.4	)		(1,245.1	)
Total stockholders' equity		1,499.4			1,446.1
Total liabilities and stockholders' equity	$	2,972.1		$	3,128.6


~~Preferred Share Purchase Rights~~				~~New York Stock Exchange~~

Hexcel Corporation and Subsidiaries
Condensed Consolidated Statements of Operations

	(Unaudited)						(Unaudited)
	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions, except per share data)	2020			2019			2020			2019
Net sales	$	286.9		$	572.5		$	1,206.6		$	1,791.4
Cost of sales		273.4			414.6			997.3			1,297.5
Gross margin		13.5			157.9			209.3			493.9
Selling, general and administrative expenses		24.6			33.8			95.2			122.8
Research and technology expenses		10.7			14.2			36.0			43.3
Other operating expense		15.8			—			43.6			—
Operating income (loss)		(37.6	)		109.9			34.5			327.8
Interest expense, net		9.7			11.0			32.4			34.9
Income (loss) before income taxes, and equity in earnings from affiliated companies		(47.3	)		98.9			2.1			292.9
Provision for (benefit from) income taxes		(56.9	)		18.2			(48.7	)		62.4
Income before equity in earnings from affiliated companies		9.6			80.7			50.8			230.5
Equity in earnings (loss) from affiliated companies		0.1			(0.4	)		0.3			2.9
Net income	$	9.7		$	80.3		$	51.1		$	233.4
Basic net income per common share	$	0.12		$	0.94		$	0.61		$	2.74
Diluted net income per common share	$	0.12		$	0.93		$	0.61		$	2.71
Dividends per share	$	—		$	0.17		$	0.17		$	0.47
Weighted-average common shares:
Basic		83.8			85.1			83.7			85.1
Diluted		84.0			86.1			84.0			86.1


(In millions)	September 30, 2020		December 31, 2019
Raw materials	$	121.5	$	154.9
Work in progress		26.7		40.9
Finished goods		114.7		137.3
Total Inventory	$	262.9	$	333.1



(In millions)	September 30, 2021		December 31, 2020
Raw materials	$	112.0	$	94.9
Work in progress		37.6		23.6
Finished goods		94.9		95.0
Total Inventory	$	244.5	$	213.5


(In millions)	Composite Material			Engineered Products			Total			Composite Material			Engineered Products			Total
Balance at December 31, 2019	$	12.8		$	39.9		$	52.7
Balance at December 31, 2020										$	7.8		$	35.3		$	43.1
Net revenue billed		(1.4	)		4.6			3.2			1.6			(2.4	)		(0.8	)
Balance at March 31, 2020	$	11.4		$	44.5		$	55.9
Balance at March 31, 2021										$	9.4		$	32.9		$	42.3
Net revenue billed		0.5			(1.7	)		(1.2	)		(1.8	)		—			(1.8	)
Balance at June 30, 2020	$	11.9		$	42.8		$	54.7
Balance at June 30, 2021										$	7.6		$	32.9		$	40.5
Net revenue billed		(3.2	)		(2.6	)		(5.8	)		(0.3	)		(1.8	)		(2.1	)
Balance at September 30, 2020	$	8.7		$	40.2		$	48.9
Balance at September 30, 2021										$	7.3		$	31.1		$	38.4


Goodwill and Intangible Assets	Composite			Engineered
(In millions)	Materials			Products			Total
Balance at December 31, 2020	$	98.7		$	179.1		$	277.8
Amortization expense		(1.5	)		(3.8	)		(5.3	)
Currency translation adjustments		(2.7	)		0.1			(2.6	)
Balance at September 30, 2021	$	94.5		$	175.4		$	269.9

(In millions)	Unrecognized Net Defined Benefit and Postretirement Plan Costs			Change in Fair Value of Derivatives Products (1)			Foreign Currency Translation			Total
Balance at December 31, 2019	$	(22.4	)	$	(6.9	)	$	(89.4	)	$	(118.7	)
Other comprehensive income (loss) before reclassifications		—			(2.3	)		22.7			20.4
Amounts reclassified from accumulated other comprehensive loss		(0.2	)		13.3		—				13.1
Other comprehensive income (loss)		(0.2	)		11.0			22.7			33.5
Balance at September 30, 2020	$	(22.6	)	$	4.1		$	(66.7	)	$	(85.2	)