X annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934


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

 

Commercial Aerospace

 

The commercial aerospace industry is our largest user of advanced composites.  The economic benefits airlines can obtain from weight savings in both fuel economy and aircraft range, combined with the design enhancement that comes from the advantages of advanced composites over traditional materials, have caused the industry to be the leader in the use of these materials.  While military aircraft and space craft have championed the development of these materials, commercial aerospace has had the greater consumption requirements and has commercialized the use of these products.  Accordingly, the demand for advanced structural material products is closely correlated to the demand for commercial aircraft.

 

The use of advanced composites in commercial aerospace is primarily in the manufacture of new commercial aircraft.  The aftermarket for these products is very small as many of these materials are designed to last for the life of the aircraft.  The demand for new commercial aircraft is driven by two principal factors, the first of which is airline passenger traffic (the number of revenue passenger miles flown by the airlines) which affects the required size of airline fleets.  According to the International Civil Aviation Organization, passenger traffic has grown at an annual compound rate of 5.5% from 1985 to 2006 and has seen year on year growth of 5.5% (estimate), 5.9% and 8.0% during 2007, 2006 and 2005, respectively.  Growth in passenger traffic requires growth in the size of the fleet of commercial aircraft operated by airlines worldwide.

 

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

 

Each new generation of commercial aircraft has used increasing quantities of advanced composites, replacing metals.  This follows the trend previously seen in military fighter aircraft where advanced composites may now exceed 50% of the weight of the airframe.  Early versions of commercial jet aircraft, such as the Boeing 707, which was developed in the early 1950’s, contained almost no composite materials.  One of the first aircraft to use a meaningful amount of composite materials, the Boeing 767 entered into service in 1983, and was built with an airframe containing approximately 6% composite materials.  The airframe of Boeing’s 777 aircraft, which entered service in 1995, is approximately 11% composite.  By comparison, the next generation of aircraft in development will contain significantly higher composite content by weight.  The Airbus A380 which was certified in December 2006, is being built with an airframe containing approximately 23% composite by weight.  The first aircraft was delivered in 2007.  Boeing is starting to assemble the first 787 aircraft with a content of 50% or more composite materials by weight.  Its maiden flight is expected in mid-2008 and the aircraft is projected to enter into service early in 2009.  In December 2006, Airbus formally launched the A350 XWB also projected to have a composite content of 50% or more by weight.  The A350 XWB is forecast to enter into

 

5
service in 2013.

 

The impact of Boeing and Airbus’ production rate changes on us is typically influenced by two factors: the mix of aircraft produced and the inventory supply chain effects of increases or reductions in aircraft production.  We have products on all Boeing and Airbus planes.  The dollar value of our materials varies by aircraft type – twin aisle aircraft use more of our materials than narrow body aircraft and newer designed aircraft use more our materials than older generations.   On average, for established programs we deliver products into the supply chain about six months prior to aircraft delivery.  Depending on the product, orders placed with us are received anywhere between one and eighteen months prior to delivery of the aircraft to the customer.  For aircraft that are in the ramp-up stage, such as the A380 and the B787, we will have sales as much as a few years in advance of the delivery.  Increased aircraft deliveries combined with the secular penetration resulted in our commercial aerospace revenues increasing by approximately 14% and 16% in 2007 and 2006, respectively.

 

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

 

 

 

1994

 

1995

 

1996

 

1997

 

1998

 

1999

 

2000

 

2001

 

2002

 

2003

 

2004

 

2005

 

2006

 

2007

 

Boeing (including McDonnell

Douglas)

 

312

 

256

 

271

 

375

 

563

 

620

 

491

 

527

 

381

 

281

 

285

 

290

 

398

 

441

 

Airbus

 

123

 

124

 

126

 

182

 

229

 

294

 

311

 

325

 

303

 

305

 

320

 

378

 

434

 

453

 

Total

 

435

 

380

 

397

 

557

 

792

 

914

 

802

 

852

 

684

 

586

 

605

 

668

 

832

 

894

 

 

Commercial aerospace represented 53% of our 2007 net sales. Approximately 74% of these revenues can be identified as sales to Boeing, Airbus and their subcontractors for the production of commercial aircraft. The balance of our commercial aerospace sales are related to regional and business aircraft manufacture, and other commercial aircraft applications. Regional aircraft production has also increased over time, but does not directly follow the cycle of large commercial aircraft deliveries. These applications also exhibit increasing utilization of composite materials with each new generation of aircraft.

 

Industrial Markets

 

We group under this market segment revenue from applications for our products outside the aerospace and electronics markets. A number of these applications represent emerging opportunities for our products.  In developing new applications, we seek those opportunities where advanced composites technology offer significant benefits to the end user, often applications that demand high engineering performance.  Within this segment, the major end market sub-segments include, in order of size based on our 2007 sales, wind energy, general industrial applications, recreational equipment (e.g., bicycles, snowboards, tennis rackets and hockey sticks), and  transportation (e.g., automobiles, mass transit and high-speed rail, and marine applications).  Our participation in these market applications complements our commercial and military aerospace businesses, and we are committed to pursuing the utilization of advanced structural material technology where industrial customers can generate significant value.

 

Space & Defense

 

The space & defense market has historically been an innovator in the use of, and source of significant demand for, advanced composites.  The aggregate demand by space and defense customers is primarily a function of procurement of military aircraft that utilize advanced composites by the United States and certain European governments.   We are currently qualified to supply materials to a broad range of over 80 military aircraft and helicopter programs.  The top ten programs by revenues represent less than 50% of our Space & Defense revenues.  These programs include the F/A-18E/F Hornet, the F-22 Raptor, and the Eurofighter (Typhoon), as well as the C-17, the V-22 Osprey tiltrotor aircraft, and the Blackhawk, Tiger and NH90 helicopters.  In addition, there are new programs in development such as the F-35 (Joint Strike Fighter or “JSF”), CH53K heavy lift helicopter and the EADS A400M military transport planned to enter production later in the decade.  The benefits that we obtain from these programs will depend upon which are funded and the extent of such funding.  Space applications for advanced composites include solid rocket booster cases, fairings and payload doors for launch vehicles, and buss and solar arrays for military and commercial satellites.

 

Contracts for military and some commercial programs may contain provisions applicable to both U.S. Government contracts and subcontracts.  For example, under a termination for   convenience clause, the prime contractors may flow down this clause to materials suppliers such as Hexcel.  According to the terms of a contract, we may be subject to U.S. government Federal Acquisition Regulations, Department of Defense Federal Acquisition Regulations Supplement, Cost Accounting Standards, and associated procurement laws.

 

Further discussion of our markets, including certain risks, uncertainties and other factors with respect to “forward-looking statements” about those markets, is contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 
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