HEXCEL CORP /DE/ (HXL)

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

Business Overview

We are a global leader in advanced lightweight composites technology. We propel the future of flight and transportation through excellence in advanced material lightweighting solutions that create a better world for us all. Our broad and unrivaled product range includes carbon fiber, specialty reinforcements, prepregs and other fiber-reinforced matrix materials, honeycomb, resins, engineered core and composite structures for use in commercial aerospace, defense and space, and industrial applications.

We serve international markets through manufacturing facilities, sales offices and representatives located in the Americas, Europe, Asia Pacific, India, and Africa.

We are a manufacturer of products within a single industry: Advanced Composites. We have two reportable segments: Composite Materials and Engineered Products. The Composite Materials segment is comprised of our carbon fiber, specialty reinforcements, 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 composite structures, radio frequency/electromagnetic interference (“RF/EMI”) and microwave absorbing materials, engineered core and specialty machined honeycomb products with added functionality.

Recent growth in aircraft build rates has favorably impacted our business. We have, however, in the last several years been impacted by delays in aircraft production rates, related to, among other factors, global logistics, supply chain destocking and other supply chain constraints. Hexcel has also been negatively impacted by macroeconomic and geopolitical conditions, including inflationary pressures, tariffs, and global conflicts. While these challenges have had and may continue to have further negative impacts on our operations and financial results, we see indicators for a long-term positive outlook in commercial aircraft production and strong demand in the defense and space market as global defense budgets continue to increase as a result of an uncertain geopolitical environment and the development of new platforms. As a result of the Middle East conflict, we are actively monitoring the markets and are taking actions to mitigate near-term impact to our cost base. Currently, we have limited direct exposure, but a prolonged conflict is likely to precipitate cost and logistic pressures as well as inventory challenges.

Financial Overview

Results of Operations

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Net Sales

The following table summarizes net sales to third-party customers by segment and end market for the quarters and six months ended June 30, 2026 and 2025:

Sales by Segment

Composite Materials: Net sales of $421.5 million in the second quarter of 2026 increased by $28.3 million or 7.2% from the prior year quarter. Commercial Aerospace sales increased $39.3 million or 15.7% in the second quarter of 2026 as compared to the prior year quarter driven by higher sales to Boeing and Airbus. Defense, Space & Other net sales in the second quarter of 2026 decreased $11.0 million or 7.7% primarily driven by the September 30, 2025 divestment of the Austrian-based industrial business. Net sales for the segment in the first half of 2026 of $820.3 million increased 8.1% compared to the same period last year.

Engineered Products: For the second quarter of 2026, net sales of $107.8 million increased $11.1 million or 11.5% as compared to the prior year quarter driven by higher Commercial Aerospace sales. Net sales of $210.5 million for the first six months of 2026 increased 12.0% compared to the same period last year.

Sales by Market

For the second quarter of 2026, Commercial Aerospace sales of $346.6 million increased by 18.3% as compared to the second quarter of 2025. Sales growth was driven by the Airbus A350 and Boeing 787 widebodies. Narrowbody sales, which include Boeing's 737 MAX and Airbus' A320neo and A220, also increased year over year. Other Commercial Aerospace sales for the second quarter of 2026 increased compared to the prior year quarter due to growth in regional jets. Sales of $679.3 million increased 18.5% for the first six months of 2026 compared to the first six months of 2025 due to growth in all four major platforms which included the Airbus A350 and A320neo and the Boeing 787 and 737 MAX. Other Commercial Aerospace sales increased 9.2% for the first six months of 2026 compared to the same period in 2025 with sales increasing for both regional and business jets.

Defense, Space & Other sales of $182.7 million decreased 7.2% in the second quarter of 2026 as compared to the second quarter of 2025. Sales of $351.5 million decreased 5.8% for the first six months of 2026 as compared to the first six months of 2025. Both the quarter and six months ended June 30, 2026 decreased over the respective prior year periods which reflected the September 30, 2025 divestment of the Austrian-based industrial business.

Gross Margin

Gross margin for the second quarter of 2026 was 26.1% compared to 22.8% in the second quarter of 2025 and was 26.5% and 22.6% for the first six months of 2026 and 2025, respectively. The higher margins for both the second quarter and six months of 2026 compared to the prior year periods benefited from higher sales leverage.

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Operating Expenses

Selling, general and administrative expenses were higher for both the second quarter and six months ended June 30, 2026 as compared to the prior year periods primarily due to higher employee-related costs. Research and development expenses for the second quarter and first six months of 2026 increased compared to the same periods of 2025 primarily due to higher employee-related expenses and material and supplies costs.

Other operating expense for the second quarter of 2026 reflected restructuring charges related to the shutdown of industrial-related manufacturing at the Leicester, UK facility. For the six months ended June 30,2026, other operating expense included restructuring charges related to the Leicester, UK facility and non-recurring professional fees. Other operating expense for the second quarter and first six months of 2025 included restructuring charges related to the closure of the Welkenraedt, Belgium facility. The six months ended June 30, 2025 also included a loss for the divestiture of the Hartford, Connecticut business.

Operating Income

Operating income for the second quarters of 2026 and 2025 was $72.6 million and $30.0 million, respectively. Operating income for the first six months of 2026 was $130.2 million compared to $74.2 million for the same period last year. Overall, operating income for both the second quarter and six months of 2026 was favorably impacted by the higher sales and gross margins.

Interest Expense, Net

Interest expense for both the quarter and six months ended June 30, 2026 was higher compared to the prior year periods due to higher average borrowings for the first six months of 2026.

Provision for Income Taxes

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of the Company’s financial condition and results of operations for the year ended December 31, 2025, and comparison to the year ended December 31, 2024 should be read in conjunction with the consolidated financial statements and notes of this Annual Report on Form 10-K.

For discussion and analysis of financial condition and results of operations for 2024 compared to 2023 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2024 Annual Report on Form 10-K, filed with the SEC on February 5, 2025, which is incorporated by reference into this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Business Overview

Business Trends

Since 2022, the Commercial Aerospace market and our business have seen signs of recovery from the economic impacts of the COVID-19 pandemic, driven by growth in air travel and an increase in aircraft build rates. The post-recovery period, however, has had many challenges across the markets Hexcel operates in, including delays in aircraft production rates, related to, among other impacts, global logistics, supply chain issues, economic conditions, inflationary pressures, tariff impacts, and effects from geopolitical issues and conflicts. While these challenges have had and may continue to have further negative impacts on our operations, supply chain, transportation networks and customers, all of which have and may continue to compress our financial results, we see positive indicators for a sustained recovery in commercial aircraft production and strong demand in the defense and space market as global defense budgets continue to increase as a result of an uncertain geopolitical environment and the development of new platforms.

Beginning with the first quarter of 2025, sales are being reported for two markets, Commercial Aerospace, unchanged from past practice, and a new sales category titled Defense, Space & Other, which combines the previous Space & Defense market and the Industrial market. Sales amounts for the year ended December 31, 2024 have been reclassified for comparative purposes.

In 2025, our Commercial Aerospace sales decreased 4.0% compared to 2024 primarily due to lower sales for certain Airbus and Boeing programs, partially offset by increased Other Commercial Aerospace sales driven by strength in regional jets. The demand for new commercial aircraft continues to be principally driven by airline passenger traffic (measured by revenue passenger miles) and the replacement rate for existing aircraft. The Commercial Aerospace industry continues to utilize a greater proportion of advanced composite materials with each new generation of aircraft.

Defense, Space & Other sales in 2025 increased 5.4% compared to 2024. Year over year growth was led by military helicopters, including the Black Hawk and CH-53-K, as well as other military aircraft structures, launchers and satellites.

Results of Operations

We have two reportable segments: Composite Materials and Engineered Products. Although these segments provide customers with different products and services, they often overlap within our two end business markets: Commercial Aerospace and Defense, Space & Other. Therefore, we also find it meaningful to evaluate the sales of our segments through these business markets. Further discussion and additional financial information about our segments may be found in Note 18 to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

Net Sales: Consolidated net sales of $1,893.9 million for 2025 decreased by less than 1% compared to 2024.

The following table summarizes net sales to third-party customers by segment and end market in 2025 and 2024:

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Sales by Segment

Composite Materials: Net sales of $1,516.2 million for the year ended December 31, 2025 decreased $14.8 million or 1.0% from the prior year. Commercial Aerospace sales decreased 2.8% in 2025 as compared to 2024 primarily driven by lower sales for certain Airbus and Boeing programs. Defense, Space & Other sales for 2025 increased by 2.5% over the prior year primarily driven by higher sales of launchers.

Engineered Products: For the year ended December 31, 2025, net sales of $377.7 million increased $5.7 million or 1.5% as compared to the prior year, driven by a 13.4% increase in Defense, Space & Other sales driven by military helicopters and aircraft structures, partially offset by a 10.4% decrease in Commercial Aerospace sales attributable to softness in select Boeing and other commercial aerospace programs.

Sales by Market

Commercial Aerospace: Net sales of $1,146.9 million decreased 4.0% for the year ended December 31, 2025 as compared to the year ended December 31, 2024 primarily due to lower sales for the Airbus A350, Boeing 787 and 737 MAX, partially offset by increased Airbus A320neo sales. Other Commercial Aerospace sales increased reflecting growth in regional jets.

Defense, Space & Other: For the year ended December 31, 2025, net sales of $747.0 million increased 5.4% as compared to the year ended December 31, 2024. The increase was due to strength in domestic and international helicopter programs including the Black Hawk, CH-53K, and a European fighter program as well as growth in launchers and satellites.

2025 Consolidated Results Compared to 2024

Gross Margin: Gross margin for 2025 was $434.8 million or 23.0% of net sales as compared to $469.8 million or 24.7% of net sales in 2024. Lower margins for 2025 as compared to the prior year were due to sales mix, tariffs, and inventory reduction actions which drove unfavorable cost leverage.

Selling, General and Administrative (“SG&A”) Expenses: SG&A expenses for 2025 were $169.0 million or 8.9% of net sales as compared to $176.6 million or 9.3% of net sales for 2024. The $7.6 million decrease in SG&A expenses in 2025 compared to 2024 was primarily due to lower employee-related costs partially offset by higher professional fees.

Research and Technology (“R&T”) Expenses: R&T expenses for 2025 were $56.4 million or 3.0% of net sales and in 2024 were $57.1 million or 3.0% of net sales. The year-over-year decrease of $0.7 million was primarily attributable to lower material and supplies costs.

Other operating expense: For the year ended December 31, 2025, other operating expense was $37.8 million which included charges of $28.2 million related to the closure of the Belgium facility, $4.5 million for the divestitures of the Austria and Hartford, Connecticut businesses and a $3.9 million non-income tax charge related to the net value of a foreign entity. Other operating expense for the year ended December 31, 2024 of $50.0 million included $47.7 million of asset impairments and other charges primarily associated with the divestiture of the Austria business and $2.3 million of restructuring costs.

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Operating income: Operating income for the year ended December 31, 2025 was $171.6 million as compared to $186.1 million for the year ended December 31, 2024. Operating income as a percent of sales was 9.1% and 9.8% in 2025 and 2024, respectively. The decrease in operating income in 2025 compared to 2024 was driven by lower margins, partially offset by lower SG&A expenses and Other operating expense as mentioned above.

Depreciation and amortization expense of $122.3 million for the year ended December 31, 2025 decreased $1.7 million from the year ended December 31, 2024.

Other income: Other non-operating income for the year ended December 31, 2025 of $1.1 million included settlement and curtailment gains related to our U.S. and Belgium retirement plans, partially offset by debt extinguishment costs. We did not incur other non-operating income in 2024.

Interest expense: Interest expense was $37.7 million and $31.2 million for the years ended December 31, 2025 and 2024, respectively, with the year over year increase due to higher average debt levels.

Income tax expense: For the years ended December 31, 2025 and 2024, we had a tax provision of $25.6 million and $22.8 million, respectively.

Net income: Net income was $109.4 million or $1.37 per diluted share for the year ended December 31, 2025 compared to net income of $132.1 million or $1.59 per diluted share for the year ended December 31, 2024. The decrease in 2025 was driven by lower margins.

Financial Condition

In 2025, we ended the year with total debt, net of cash, of $922.0 million and generated $230.5 million of operating cash resulting in $157.2 million of free cash flow (cash provided by operating activities less cash paid for capital expenditures). We expect our cash flow needs for fiscal year 2026 will be funded by cash generated from our operations as well as available borrowings under our Senior Unsecured Revolving Credit Facility (the “Facility”) as needed.

We have a portfolio of derivatives related to currencies, interest rates and commodities. We monitor our counterparties, and we only use those rated investment grade.

Liquidity

Our cash on hand at December 31, 2025 was $71.0 million, as compared to $125.4 million at December 31, 2024. Of the total cash on hand at December 31, 2025, $39.9 million was held by our foreign locations. As of December 31, 2025 total debt was $993.0 million, as compared to $700.7 million at December 31, 2024. As of December 31, 2025, we were in compliance with all debt covenants.

As of December 31, 2025, total outstanding borrowings under the Facility were $295.0 million. The credit agreement for the Facility permits us to issue letters of credit up to an aggregate amount of $50 million. Outstanding letters of credit reduce the amount available for borrowing under the Facility. As of December 31, 2025, there were no issued letters of credit under the Facility, resulting in undrawn availability under the Facility of $455.0 million.

Short-term liquidity requirements consist primarily of normal recurring operating expenses and working capital needs, capital expenditures, dividend payments, debt obligations and debt service requirements. We expect to meet our short-term liquidity requirements through net cash from operating activities, cash on hand and the Facility. As of December 31, 2025, long-term liquidity requirements consist primarily of obligations under our long-term debt obligations. We do not have any significant required debt repayments until February 2027 when our 3.95% Senior Unsecured Notes are due.

For more information regarding debt, including the Facility, see Note 6, Debt, to the accompanying consolidated financial statements of this Annual Report on Form 10-K.

On October 22, 2025, the

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