over the past year Hexcel faced challenges in the carbon fiber
market, where demand for aerospace grade fiber (Hexcel’s core
carbon fiber product) has been at reduced levels. These reduced
rates of production reflect the Asian effect on commercial aerospace
production, customer productivity improvement and the reduction
of excess inventories carried by military and space customers
that were created during a recent period of carbon fiber shortages.
Our ability to sell our surplus capacity to markets with less
stringent product specifications has been limited by the recent
increases in global manufacturing capacity for carbon fibers.
These factors resulted in our carbon fiber business operating
at about 50% of capacity in 1999 versus 90% of capacity the prior
year. The resulting impact on Hexcel’s performance has been significant,
but we expect aerospace demand to grow substantially over the
next few years with the anticipated build up in military and space
programs. Likewise, we expect further growth in our carbon fiber
production as Hexcel expands the use of its fibers in additional
commercial aerospace products.
response to market fluctuations has been, and continues to be
proactive. Indeed, we have successfully reduced overall costs,
improved operational effectiveness, reduced debt and sharpened
the focus on our core businesses. As outlined below, our response
to these market challenges is founded upon the principles of business
consolidation, Lean Enterprise initiatives and debt reduction.
ConsolidationComprehensive plans were initiated to reduce
both selling and administrative expenses, as well as manufacturing
costs. Our business units have been reorganized on a global versus
a regional basis and manufacturing capacity has been consolidated
to reduce surplus and concentrate on regional centers of manufacturing
excellence. These actions are expected to produce ongoing savings
of approximately $40 million per year by 2001. A portion of these
savings has already been achieved.
EnterpriseNot only are we reducing the size of our manufacturing
infrastructure, but we are trying to fundamentally change the
way we manufacture our products. Hexcel’s Lean Enterprise initiatives
are a long-term plan to improve asset utilization, reduce costs
and improve quality and operating efficiencies. Our efforts have
already resulted in significant reductions in inventory and improved
product quality. This is an ongoing commitment by the company
to be a top performer in product quality and cost.
ReductionWe are committed to strengthening our balance
sheet through generating free cash flow to repay debt. In 1999
we reduced Hexcel’s debt by $86 million and, as a result, exceeded
our goal of generating $100 million in free cash flow over the
five quarter period ended December 31, 1999. Our Lean Enterprise
initiatives aided the achievement of these goals with a reduction
in inventory of approximately $60 million, or 30% in 1999. While
reductions of this magnitude cannot be achieved each year, cash
generation remains an area of emphasis for the company.
the above actions are substantial, comprehensive and will be effective
in addressing the market challenges outlined earlier in this letter.
The outlook for our markets beginning in 2001 appears more favorable.
Over the next five years, we expect substantial growth in both
our electronics and space and defense markets. Electronics will
be driven by the significant growth forecasted in personal electronic
devices and Internet hardware related products. Demand for fiberglass
electronic materials is expected to substantially outperform GDP
growth and possibly achieve double-digit annual growth for lightweight
fabrics. In the space and defense markets we are also expecting
strong five year growth owing to Hexcel’s broad position on most
US and European military programs. While funding cornmitments
for the military budget will always be a political decision, we
believe that most, if not all of the new military aircraft programs
currently completing their development will be funded and enter
into full rate production.