Hexcel Corporation

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Hexcel Corporation

Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901-3238
U.S.A.
(203) 969-0666
Fax: (203) 358-3993
Web site: http://www.hexcel.com

Public Company
Incorporated : 1948 as California Reinforced Products Company
Employees : 5,597
Sales : $1.09 billion (1998)
Stock Exchanges : New York Pacific
Ticker Symbol : HXL
NAIC : 332116 Metal Stamping; 31321 Broadwoven Fabric Mills; 335991 Carbon and Graphite Product Manufacturing; 325211 Plastics Material & Resin Manufacturing; 32552 Adhesive Manufacturing; 31332 Fabric Coating Mills

Hexcel Corporation is the worldwide leader in the manufacture of advanced structural composites. These materials, which include honeycomb-cell reinforced structures, resin-coated woven fiber sheets, and other types of composite products, are used in a variety of applications where light weight and strength are required. About half of the company’s sales are to aircraft manufacturers, while another tenth are to space and defense contractors. The remainder of Hexcel’s customers include makers of athletic equipment, such as tennis racquets and running shoes, manufacturers of printed circuit boards, and the construction industry. The company also manufactures specialty chemicals that are used in such products as cough syrup and mouthwash. Since emerging from bankruptcy in 1995, Hexcel has begun acquiring companies that add to its strengths. A merger with the composite division of the Swiss chemical giant Ciba-Geigy in 1996 gave that company almost half of Hexcel’s stock. Wary of its longtime reliance on the aerospace and defense industries, Hexcel has been seeking diversification to give it greater stability, completing a series of major acquisitions following the merger that have given the company a wider range of products than ever before.

Early Years

In 1946 two engineers working at the University of California-Berkeley, Roger Steele and Roscoe Hughes, decided to explore the possible commercial uses of a variety of new plastics and construction technologies developed during World War II. Working initially out of Hughes’s basement, Steele refined a product called expanded honeycomb over the next two years. In 1948, following a successful demonstration of expanded honeycomb at a government-sponsored plastics conference, the newly christened California Reinforced Plastics Company was awarded its first contract, for research and development of honeycomb materials for use in radar domes on military aircraft. The company was incorporated in September of that year. In 1949 California Reinforced Plastics gambled, submitting an intentionally low bid to produce fuel cell support panels for the B-36 bomber; the bid was accepted, further cementing the new company’s ties to the defense industry.

The early 1950s saw continued growth, and in 1954 the company’s name was changed to Hexcel Products, Inc., which was derived from the hexagonal cell-shaped honeycomb materials which it manufactured. These cellular structures, made from galvanized fiberglass or aluminum and other materials, were lighter in weight and stronger than a comparable amount of steel, and were ideal for use in aircraft where any weight that could be saved in construction could be allocated to pay load or fuel.

By the late 1950s a national recession and a series of military cutbacks were affecting Hexcel’s sales. In 1961 the company chose a new president, William S. Powell, who subsequently restructured the company’s operations, exiting several unprofitable lines of business. Soon after this the military buildup of the Vietnam War era caused the company’s sales to climb again, with record sales to profits ratios between 1962 and 1967. A new manufacturing plant was begun in Arizona in 1965, and in 1967 Hexcel’s first overseas operation came on line, in Welkenraedt, Belgium. In 1968 Hexcel purchased one of its major suppliers, Coast Manufacturing, and that company’s three manufacturing plants. Hexcel products were now being used in military and commercial aviation as well as the United States space program. The landing pads on the lunar module that carried the first men to the moon were built from Hexcel honeycomb materials. The company’s revenues in this period were still almost exclusively derived from honeycomb products.

Another sales slump at the start of the 1970s saw Hexcel implement further changes. Harvie M. Merrill, who had become CEO and president in 1969, began to seek markets outside of the company’s traditional aerospace and defense areas. One such venture was the introduction of skis made of composite materials. The company brought these to market in 1971, the first time it had made something for direct retail sale. Unfortunately Hexcel’s lack of experience in this field doomed the effort, despite positive responses to the product’s quality, and the ski operation was eventually sold. In 1975 Hexcel acquired a company that specialized in graphite weaving technology and in 1977 it purchased Tower Scientific, a manufacturer of replacement knee, hip, and shoulder joints. Other efforts to diversify at this time included development of different types of composites and increasing the company’s production of specialty chemicals and resins. By 1978 the company’s sales of honeycomb materials were split 50/50 with other composites, though the bulk of sales were still to defense and aerospace manufacturers. Hexcel stock, which had previously traded on the Pacific Stock Exchange, was listed on the New York Exchange in 1980.

1980s: Financial Challenges

By the late 1970s economic recession had forced Hexcel to retrench yet again. Returning to a focus on its core technologies, the company sold its medical products line soon after its exit from the ski market in 1981. Efforts to reach European customers were broadened during this time with the purchase of half of Stevens-Genin S.A., a French maker of glass-fiber and woven industrial materials, and the acquisition of Seal Sands Chemical Co. Ltd. of England, a specialty chemicals manufacturer. The remainder of Stevens-Genin was acquired five years later. Hexcel-produced composites were used in several high-profile ways during this decade, with the space shuttle Columbia and the Voyager aircraft both making extensive use of the company’s products. In the latter case, Hexcel composites comprised some 80 percent of the structural space, but only 20 percent of the weight of the aircraft that made the world’s first non-refueled circumnavigation.

In 1986 CEO Merrill stepped down, to be replaced by COO Robert L. Witt. The company also began building a new plant in Chandler, Arizona, to facilitate the company’s participation in building the U.S. military’s B-2 “Stealth” bomber. This top-secret project reportedly used Hexcel composites to improve the radar-evading capabilities of the plane. Unfortunately for the company, the easing of the Cold War and the resulting changes in military priorities caused delays in orders for the planes just as the Arizona facility was coming on line. As it had done several times before, Hexcel did some belt-tightening and laid off a small number of employees, also redirecting the company’s new Arizona operations toward producing materials for commercial aerospace, which was in a growth period. Sales had peaked in fiscal 1988 at $399 million, but dropped off the following year, though Hexcel still posted a profit. The company had a total of 17 manufacturing facilities worldwide at this time.

In 1990 Hexcel announced the formation of a joint venture with a Japanese company, Dainippon Ink & Chemicals, to manufacture honeycomb composites in Japan, with a late 1991 start-up date projected. The company also began working with Reebok, the shoe manufacturer, to develop honeycomb arch supports for its shoes, which it began to manufacture in Casa Grande, Arizona. Hexcel materials were also used in the highspeed trains that ran through the English channel “Chunnel” tunnel, in fishing rods, golf clubs, baseball bats, bicycle frames, and many other civilian, non-aerospace goods. The company also manufactured chemicals which were used as ingredients in Alka-Seltzer tablets, Scope mouthwash, and Vicks Formula 44 cough syrup. These specialty chemicals accounted for as much as nine percent of the company’s sales at this time. Nevertheless, the company still realized most of its profits from sales to the commercial aerospace business.

As competition among airlines heated up following the Reagan administration’s deregulation of the industry, and profit margins began to tighten or disappear, airplane manufacturers soon found orders for new planes delayed or canceled. Hexcel’s two biggest customers, Boeing and Airbus, both cut back their orders for composites, resulting in a severe reduction in income for the company. While sales to aerospace firms had accounted for some 40 percent of Hexcel’s revenues, they were responsible for almost 70 percent of profits. As a result of the downturn, losses for fiscal 1992 stood at $17.3 million, and the company was forced to take drastic action. A restructuring was announced in late 1992, with a 20 percent reduction in the company’s workforce, and sales or closings of more than a third of its facilities. An attempt to ward off competitor BASF, by buying the German company’s main U.S. plant, failed in early 1993 when the two concerns could not agree on a price. In July 1993, CEO Bob Witt resigned, to be replaced by the team of John Lee and John Doyle, both company directors.

Company Perspectives

Hexce’s operating principles are: Customer Satisfaction—Customer satisfaction is our highest priority. We will provide the highest quality materials and services to make our customers’ products stronger, lighter, better; Continuous Improvement—We will always strive to improve and we will pursue continuous improvements in all of our activities through measured performance in a fact-based culture; Simplicity and Speed—In all that we do, we seek to simplify the task by identifying what is essential and then to implement with efficiency and speed; Employee Commitment and Pride—The strength within Hexcel is its employees. Our success depends on hiring, developing and retaining employees who are knowledgeable, committed to teamwork and proud of what they do. We will provide them with an open, creative and safe workplace, communicating to them frequently and honestly; Honoring Commitments—We will live up to the commitments we make to our customers, employees, suppliers, shareholders and the communities in which we do business.

Bankruptcy Protection in 1993

Despite its best efforts, including a second restructuring plan announced in September 1993, Hexcel could not stop the losses, and the company decided to enter Chapter 11 bankruptcy protection in December of that year. The following August the company announced that it would sell its Chandler, Arizona, plant to Northrop Grumman, builder of the B-2 bomber, for $30 million. Hexcel sold a vacant plant in Los Angeles in November for $2.6 million and its European resins business for $9 million at year’s end. In early February 1995 the company emerged from Chapter 11, having arranged $45 million in exit financing from Citicorp. Another $50 million was obtained from a stock offering arrangement with Mutual Series Fund, Inc.

Soon after it left bankruptcy protection, the company announced a merger with the composites division of Ciba-Geigy, the Swiss chemical and pharmaceuticals giant. The Anaheim, California-based Ciba Composites had 1994 sales of $293 million, just slightly lower than Hexcel’s $313.8 million. The unusual arrangement, in which Hexcel gave Ciba-Geigy 49.9 percent of its stock and over $70 million to pay off long-term debt, strengthened Hexcel’s presence in the aerospace market, and particularly in Europe. Ciba Composites specialized in composite resins and structural materials, but did not manufacture honeycomb. It supplied many of the same industries as Hexcel, and the European jet maker Airbus was a major customer. Ciba also brought to the merger Heath Tecna, a company which manufactured composites-based aircraft interior furnishings. The combined companies retained the name of Hexcel. John Lee took the post of CEO, while Ciba Composites President Juergen Habermeier was named Hexcel president and chief operating officer. Following the merger Hexcel consolidated some of its facilities, announcing the closing of its U.S. Materials site in Anaheim and a layoff of some 156 workers. The expanded company now employed 4,700 people at 19 plants located in seven countries.

In June 1996 another major competitor, the Composites Products Division of Hercules, Inc., was acquired. This purchase strengthened Hexcel’s efforts to increase the company’s vertical integration by adding a carbon fiber plant outside of Salt Lake City. Soon thereafter another major acquisition was thwarted, as Hexcel’s plan to purchase Fiberite, Inc., the second leading U.S. composites maker, was threatened with an antitrust investigation by the Federal Trade Commission. The company backed off, purchasing only Fiberite’s satellite-materials business and the rights to certain technologies.

In February 1998 Hexcel announced the formation of a joint venture with Boeing and two Malaysian aviation firms to be called Asian Composite Manufacturing Sdn. Bhd. The new company would build a plant in Malaysia to make composite parts for aircraft. Final assembly would be completed at Hexcel’s Kent, Washington, facility. Another joint venture with Boeing was to be located in China. BHA Aero Composite was to be a three-way venture that also involved Aviation Industries of China. In addition to these aerospace-related moves, Hexcel also formed an alliance with Sika Finanz AG of Switzerland, a maker of construction chemicals and adhesives, to develop and market composite products for the construction industry. In the fall of 1998, the company completed acquisition of most of Clark-Schwebel, Inc., a maker of glass fiber fabrics which were used in printed electronic circuit boards. The $463 million deal gave Hexcel Clark-Schwebel’s U.S. operations and its stake in three joint ventures, with acquisition of the company’s European unit expected to follow. Hexcel Chairman John Lee announced that this would boost Hexcel’s non-aerospace sales from 35 percent to 50 percent of the company’s total revenues.

Further consolidation of operations occurred in March 1999, when Hexcel announced the closing of a Clark-Schwebel plant in Cleveland, Georgia. Since 1997 the company had been following the “Lean Enterprise” philosophy, which held that elimination of waste and redundancy in a business led to reduced costs, improved quality, and greater customer satisfaction. The company anticipated further consolidation to occur throughout 1999.

As Hexcel began its second 50 years of business, it had reached the position of global leader in the manufacture of composites. Through a series of acquisitions it had also achieved the diversification it had long been seeking. While the company was still in the process of consolidating its new acquisitions to promote greater efficiency, it was riding the crest of a wave of aircraft construction, and, with its new Clark-Schwebel acquisition, was positioned to capitalize on the increasing demand for electronic products that used printed circuit boards.