<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission file number 1-496
HERCULES INCORPORATED
A Delaware Corporation
I.R.S. Employer Identification No. 51-0023450
Hercules Plaza
1313 North Market Street
Wilmington, Delaware 19894-0001
Telephone: 302-594-5000
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 _X_ No____
As of July 30, 1997, 99,055,059 shares of registrant's common stock
were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions, except per share)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ................................... $ 502 $ 545 $ 997 $ 1,048
Cost of sales ............................... 314 354 634 679
Selling, general, and administrative expenses 68 65 134 132
Research and development .................... 14 14 28 28
Other operating expenses (income), net ...... (1) (5) 162 (6)
------- ------- ------- -------
Profit from operations ...................... 107 117 39 215
Equity in income of affiliated companies .... 4 16 20 30
Interest and debt expense ................... 9 9 19 17
Other income, net ........................... 13 8 348 20
------- ------- ------- -------
Income before income taxes .................. 115 132 388 248
Provision for income taxes .................. 40 44 205 84
------- ------- ------- -------
Net income .................................. $ 75 $ 88 $ 183 $ 164
======= ======= ======= =======
Earnings per share .......................... $ 0.75 $ 0.81 $ 1.80 $ 1.51
======= ======= ======= =======
Dividends per share ......................... $ 0.25 $ 0.23 $ .50 $ 0.46
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
------ ------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents ...................... $ 21 $ 30
Accounts and notes receivable, net ............. 395 394
Inventories
Finished products .......................... 117 154
Materials, supplies, and work in process ... 121 125
Deferred income taxes .......................... 36 36
------ ------
Total current assets ....................... 690 739
Property, plant, and equipment .................... 2,055 2,349
Accumulated depreciation and amortization ......... 1,392 1,484
------ ------
Net property, plant, and equipment ......... 663 865
Investments ....................................... 714 364
Other assets ...................................... 431 418
------ ------
Total assets ............................... $2,498 $2,386
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................... $ 122 $ 140
Accrued expenses ............................... 292 221
Short-term debt ................................ 311 313
Income taxes payable ........................... 88 20
------ ------
Total current liabilities .................. 813 694
Long-term debt .................................... 264 345
Deferred income taxes ............................. 169 129
Postretirement benefits and other liabilities ..... 389 331
Stockholders' equity
Common stock (shares issued:1997--152,349,777;
1996--152,269,076) ......................... 79 79
Additional paid-in capital ..................... 488 493
Foreign currency translation adjustment ........ 4 45
Retained earnings .............................. 2,076 1,942
------ ------
2,647 2,559
Reacquired stock, at cost (shares:1997--53,291,369;
1996--50,866,562) .............................. 1,784 1,672
------ ------
Total stockholders' equity ................. 863 887
------ ------
Total liabilities and stockholders' equity . $2,498 $2,386
====== ======
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30,
1997 1996
----- -----
<S> <C> <C>
Net cash provided by operations .................. $ 63 $ 33
----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................. (49) (47)
Proceeds of investment and fixed asset disposals . 139 147
Other, net ....................................... (3) 3
----- -----
Net cash provided by investing activities . 87 103
----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds .......................... 114 --
Long-term debt repayments ........................ (90) (25)
Change in short-term debt ........................ (2) 81
Common stock reissued ............................ 6 8
Common stock reacquired .......................... (136) (202)
Dividends paid ................................... (50) (49)
----- -----
Net cash used in financing activities ..... (158) (187)
----- -----
Effect of exchange rate changes on cash .......... (1) (1)
----- -----
Net decrease in cash and cash equivalents ........ $ (9) $ (51)
Cash and cash equivalents - beginning of period .. 30 73
----- -----
Cash and cash equivalents - end of period ........ $ 21 $ 22
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) .......... $ 13 $ 15
Income taxes .................................. 76 115
Noncash investing and financing activities:
Accounts payable for common stock acquisitions 3 20
Incentive plan stock issuances ................ 3 14
Investment in long-term note .................. 500 --
Accounts receivable from sale of
investments/asset disposals ............... 5 16
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions) (Unaudited)
1. These condensed financial statements are unaudited, but in the opinion of
management include all adjustments necessary to present fairly the Company's
financial position and results of operations for interim periods. It is
suggested that these condensed financial statements be read in conjunction with
the accounting policies and the financial statements and notes thereto included
in the Company's annual report for 1996.
2. Primary earnings per share are calculated on the basis of the average number
of common and common equivalent shares of 101,145,395 for the quarter ended June
30, 1997; 101,944,368 for the six months ended June 30, 1997; 108,851,251 for
the quarter ended June 30, 1996; 109,190,354 for the six months ended June 30,
1996. Net income has been adjusted to reflect the elimination of interest
expense, net of taxes, on the 6.5% convertible debentures.
Fully diluted earnings per share, which additionally assumes conversion
of the 8% convertible subordinated debentures, is not materially different from
primary earnings per share. In the fully diluted computation, the number of
shares is increased by 2,736,598 shares in 1997 and 2,742,465 shares in 1996.
Net income is further adjusted in the quarter and six-month periods for both
1997 and 1996 to reflect the elimination of interest expense on the 8%
debentures net of taxes.
3. Cost and expenses include depreciation as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
--- ---
<S> <C> <C>
Three months ended $19 $30
Six months ended . 41 61
</TABLE>
4. Other operating expenses for the six months ended June 30, 1997 include
charges of $141 million associated with management organizational changes and
adoption of alternative competitive strategies relative to current businesses,
announced in late February and March of 1997. This charge includes $118 million
related to asset rationalizations and impairment and $23 million related to
severance benefits.
Included in the $118 million is an impairment loss of $91 million ($23
million in Food & Functional Products and $68 million in Chemical Specialties),
where the sum of estimated future cash flows (undiscounted) was less than the
carrying amount of the assets. The amount of the impairment loss is the excess
of the carrying amount of the impaired asset over the fair value of the asset.
The fair value represents expected future cash flows from the use of the assets,
discounted at the rate used by the Company to evaluate potential investments.
Additionally, the Company recognized approximately $27 million of
rationalization charges primarily associated with certain assets, which will no
longer be utilized, and lease abandonment costs.
Concurrently, management authorized and committed the Company to a plan
to reduce its work force and accrued $23 million of severance related benefits,
of which approximately $20 million is the remaining liability at June 30, 1997.
Under the plan, approximately 260 employees will be terminated. The plan
includes reorganization of management, reductions in operating
5
<PAGE> 6
personnel at certain domestic and foreign facilities, and the consolidation of
certain support functions.
Additionally, other operating expenses include $13 million of net
environmental cleanup costs, principally for nonoperating sites and $8 million
of executive retirement benefits.
Other operating expenses (income) for the quarter and six months ended
June 30, 1996 include reductions in the estimated losses on the divestiture of
the Composite Products Division of $3 million and $5 million, respectively;
additionally, the quarter reflects a favorable settlement of an environmental
remediation claim of $2 million.
5. Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in millions) June 30,
-----------------
1997 1996
------- -------
Three Months Ended:
<S> <C> <C>
Costs incurred ... $ 11 $ 11
Amount capitalized 2 2
------- -------
Interest expense . $ 9 $ 9
======= =======
Six Months Ended:
Costs incurred ... $ 22 $ 20
Amount capitalized 3 3
------- -------
Interest expense . $ 19 $ 17
======= =======
</TABLE>
6. Other income, net for the quarter and six months ended June 30, 1997 includes
net foreign currency gains of $3 million and $14 million, respectively, and
interest income, primarily related to the $500 million note (see Note 11) of $9
million and $10 million, respectively. Additionally, the six months reflect a
gain of $357 million on completion of transactions to monetize the investment in
Tastemaker, a 50% owned flavors joint venture, and charges of $32 million
related to legal settlements and accruals.
Other income, net for the quarter and six months ended June 30, 1996
included net foreign currency gains of $5 million and $9 million and gains on
sales of real estate of $3 million and $9 million, respectively. Additionally,
the six-month period reflected a gain of $4 million related to the sale of a
business unit in December 1995.
7. Dividends received from affiliated companies accounted for on the equity
method were $0 for the quarter and six months ended June 30, 1997 and $1 million
and $4 million for the quarter and six months ended June 30, 1996, respectively.
6
<PAGE> 7
8. A summary of short-term and long-term debt follows:
<TABLE>
<CAPTION>
(Dollars in millions) June 30, December 31,
------------ ------------
1997 1996
------------ ------------
SHORT-TERM:
<S> <C> <C>
Commercial paper . $ 214 $ 265
Banks ............ 97 48
Current maturities -- --
------------ ------------
$ 311 $ 313
============ ============
</TABLE>
At June 30, 1997, Hercules had $88 million of unused lines of credit that may be
drawn as needed. Lines of credit in use or supporting commercial paper at June
30, 1997, were $97 million.
(Dollars in millions)
<TABLE>
LONG-TERM:
<S> <C> <C>
6.5% convertible subordinated debentures due 1999 $ 2 $ 2
7.85% notes due 2000 ............................ 25 25
6.625% notes due 2003 ........................... 125 125
8% convertible subordinated debentures due 2010 . 39 41
Commercial paper ................................ 50 50
Variable rate loans ............................. 14 93
Other ........................................... 9 9
------------ ------------
264 345
Current maturities of long-term debt ............ -- --
------------ ------------
Net long-term debt .............................. $ 264 $ 345
============ ============
</TABLE>
9. Interest Rate Risk Management
During the six-month period ended June 30, 1997, the Company entered
into a series of interest-rate swap agreements maturing from 1999 to mid-2007.
The swap agreements are being used to manage the Company's interest rate
exposure on its debt portfolio as well as the note received as part of the
Tastemaker transaction (see Notes 6 and 11). The aggregate notional principal
amount of all swap agreements at June 30, 1997 was $650 million.
The following table indicates the type of swaps used and their
weighted-average interest rates:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
PAY FIXED ON SWAPS
<S> <C> <C>
Notional amount (at period-end) ................. $ 650 $ 125
Average pay rate ................................ 6.5% 6.1%
Average receive rate ............................ 5.7% 5.5%
</TABLE>
10. Since 1991, the Board of Directors has authorized the repurchase of up to
74,650,000 shares of company common stock, 6,150,000 shares of which is intended
to satisfy requirements of various employee benefit programs. Through June 30,
1997, a total of 57,604,484 shares of common stock (including 6,150,000 shares
for employee benefit programs) had been purchased in the open market at an
average price of $35.58 per share.
7
<PAGE> 8
11. In March 1997, the Company completed transactions to monetize its investment
in Tastemaker for approximately $608 million, including $103 million in cash and
a $500-million, 6.2%, interest-bearing five-year note, expected to be paid in
three years, classified as "held to maturity." Equity in income of affiliated
companies includes Tastemaker earnings of $0 million and $11 million for the
quarters ended June 30, 1997, and 1996, respectively, and $11 million and $19
million for the six months ended June 30, 1997 and 1996, respectively.
Tastemaker earnings included in equity income for the year 1996 were $32
million.
In June 1997, the Company completed a joint venture of its
polypropylene fiber business with Jacob Holm & Sons A/S (Denmark). Hercules will
own 51% of the venture, which will be accounted for on the equity method. Net
sales and operating profit (loss) of the ventured fiber business, which are
included in the Chemical Specialties segment, for the quarter and six months
ended June 30, 1997, were $40 million and $5 million, respectively, and $84
million and $(28) million, respectively. For the quarter and six months ended
June 30, 1996, net sales and operating profit were $45 million and $5 million,
respectively, and $84 million and $6 million, respectively.
12. In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," and SFAS No. 129, "Disclosure of Information about Capital Structure,"
for fiscal years beginning after December 15, 1997. The provisions of SFAS No.
128 establish standards for computing and presenting earnings per share (EPS).
It replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for entities with complex capital structures. Had the SFAS No.
128 provisions been required at June 30, 1997, the Company's earnings per share
would approximate the pro-forma amounts below:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS .......... $ .76 $ .83 $ 1.83 $ 1.54
Diluted EPS ........ $ .73 $ .80 $ 1.76 $ 1.48
</TABLE>
The provisions of SFAS No. 129 established standards for disclosing
information about an entity's capital structure. Adoption of this standard will
have no effect on the Company's current disclosure requirements. In June 1997,
the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information," for
fiscal years beginning after December 15, 1997. The provisions of SFAS No. 130
establish standards for reporting and display of comprehensive income and its
components in the financial statements. This statement requires all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in the financial statements and displayed with
the same prominence as other financial statements. The provisions of SFAS No.
131 establish standards for the way that enterprises report information about
operating segments in annual financial statements and require that selected
information about operating segments in interim financial statements be
reported. It also establishes standards for related disclosure about products
and services, geographic areas, and major customers. Hercules is currently
reviewing these new standards of disclosure for adoption in 1998.
8
<PAGE> 9
13. (a) Environmental:
Hercules has been identified as a potentially responsible party (PRP)
by U.S. federal and state authorities for environmental cleanup at numerous
sites. The estimated range of the reasonably possible costs of remediation is
between $87 million and $257 million. The actual costs will depend upon numerous
factors, including the number of parties found liable at each environmental site
and their ability to pay, the actual method of remediation, outcome of
negotiations with regulatory authorities, outcome of litigation, changes in
environmental laws and regulations, technological developments, and the years of
remedial activity required, which could range up to 30 years. Hercules becomes
aware of sites in which it may be, but has not yet been named, a PRP principally
through its knowledge of investigation of sites by the U.S. Environmental
Protection Agency (EPA) or other government agency or through correspondence
with previously named PRPs requesting information on Hercules' activities at
sites under investigation. Hercules brought suit in 1992 against its insurance
carriers for past and future costs for remediation of certain environmental
sites. Hercules has not included any insurance recovery in the estimates above.
Hercules has established procedures for identifying environmental
issues at Hercules plant sites. Environmental coordinators, a designated
position at all operating facilities, are familiar with environmental laws and
regulations and are resources for identification of environmental issues.
Hercules also has an environmental audit program, which is designed to identify
environmental issues at operating plant sites. Through these programs, Hercules
identifies potential environmental, regulatory, and remedial issues.
Litigation over liability at Jacksonville, Arkansas, the most
significant site, has been pending since 1980. As a result of a pretrial court
ruling in October 1993, Hercules has been held jointly and severally liable for
costs incurred, and for future remediation costs, at the Jacksonville site by
the District Court, Eastern District of Arkansas (the Court). Appeal of the
Court's ruling will be filed promptly after issuance of a final court order. On
May 21, 1997, the Court issued a ruling that Uniroyal is liable and that
Standard Chlorine is not liable to Hercules for contribution. It is expected
that a trial on allocation of liability between Hercules and Uniroyal will take
place in mid to late 1998. We expect to appeal the Court's determination with
respect to Standard Chlorine when final judgment is entered.
Other defendants in this litigation have either settled with the
government or, in the case of the Department of Defense (DoD), have not been
held liable. Hercules appealed the Court's order finding the DoD not liable. On
January 31, 1995, the 8th Circuit Court of Appeals upheld the Court's order.
Hercules filed a petition to the U.S. Supreme Court requesting review and
reversal of the 8th Circuit Court ruling. This petition was denied on June 26,
1995, and the case was remanded to the District Court for further proceedings.
Hercules' potential costs for remediation of the Jacksonville site are
presently estimated between $31 million and $111 million. These costs are based
on Hercules' assessment of potential liability, the level of participation by
other PRPs, and current estimates of remediation costs.
9
<PAGE> 10
At June 30, 1997, the accrued liability for environmental remediation
represents management's best estimate of the probable and reasonably estimable
costs related to environmental remediation. The extent of liability is evaluated
quarterly. The measurement of the liability is evaluated based on currently
available information, including the progress of remedial investigation at each
site and the current status of negotiations with regulatory authorities
regarding the method and extent of apportionment of costs among other PRPs.
During the quarter ended March 31, 1997, based upon completion of several site
investigations, clarification of and new remediation requirements, and reduced
level of participation by other PRPs, the Company recognized a net increase in
environmental expense of $13 million. The Company does not anticipate that its
financial condition will be materially affected by environmental remediation
costs in excess of amounts accrued, although quarterly or annual operating
results could be materially affected.
(b) Litigation:
Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. In these legal proceedings, no
director, officer, or affiliate is a party or a named defendant. These suits
concern issues such as product liability, contract disputes, labor-related
matters, patent infringement, environmental proceedings, property damage, and
personal injury matters. Hercules also is a defendant in two Qui Tam ("Whistle
Blower") lawsuits brought by former employees of the Aerospace segment sold to
Alliant Techsystems. One suit involves allegations relating to submission of
false claims and records, delivery of defective products, and a deficient
quality control program. The other suit involves allegations of mischarging of
work performed under government contracts, misuse of government equipment, other
acts of financial mismanagement, and wrongful termination claims. The
government, after investigation of the allegations, declined to intervene in
either lawsuit. The first of these lawsuits is presently scheduled for trial in
1997. While damages claimed in the first suit are material, the Company believes
no damages were incurred by the government, no false claims were made to the
government, and alleged damages are speculative and unsupportable. The damages
in the second suit were not defined. The Company intends to vigorously defend
these lawsuits.
In March 1995, Hercules sold its aerospace business to Alliant
Techsystems Inc. pursuant to a Purchase and Sale Agreement between Alliant and
Hercules (the "Purchase Agreement"). As part of such sale, Hercules received an
ownership interest in Alliant and presently owns approximately 29% of Alliant's
outstanding voting common stock. In March 1997, Alliant received a partially
unsealed complaint, which named Alliant and Hercules as defendants, initiated on
an unknown date, in a qui tam action by a former employee alleging violations of
the False Claims Act; the action alleges labor mischarging to the Intermediate
Nuclear Force contract at Alliant's Bacchus Works facility in Magna, Utah;
damages are not specified; and Alliant and Hercules have agreed to share equally
the cost of defense until such time as a determination is made as to the
applicability of the indemnification provisions of the Purchase Agreement.
Hercules was also a defendant in a class action of property owners
adjacent to its Brunswick, Georgia, plant. The class members sought property
impairment related damages including damages for alleged decrease in property
values caused by the presence of toxaphene (a pesticide manufactured at the
plant from 1948 to 1980) on their properties. In February 1997,
10
<PAGE> 11
a settlement was reached and on April 2, 1997, the court approved the
settlement. The amount paid during the second quarter was not material to the
financial condition of the Company.
While it is not feasible to predict the outcome of all pending suits
and claims, management does not anticipate that the ultimate resolution of these
matters will have a material effect upon the consolidated financial position of
Hercules, although the resolution of any of the matters during a specific period
could have a material effect on the quarterly or annual operating results for
that period.
OTHER FINANCIAL INFORMATION
Operational Highlights
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
------ ------ ------ ------
NET SALES BY INDUSTRY SEGMENT
<S> <C> <C> <C> <C>
Chemical Specialties ....................... $ 267 $ 275 $ 539 $ 527
Food & Functional Products ................. 235 242 458 470
Corporate and Other ........................ -- 28 -- 51
------ ------ ------ ------
Total ................................ $ 502 $ 545 $ 997 $1,048
====== ====== ====== ======
PROFIT (LOSS) FROM OPERATIONS BY INDUSTRY SEGMENT
Chemical Specialties ....................... $ 49 $ 53 $ 3 $ 98
Food & Functional Products ................. 60 58 57 109
Corporate and Other ........................ (2) 6 (21) 8
------ ------ ------ ------
Total ................................ $ 107 $ 117 $ 39 $ 215
====== ====== ====== ======
</TABLE>
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
In late February and March of 1997, Hercules announced several changes
in executive leadership and the adoption of alternative strategies intended to
strengthen its current businesses. This will result in the shutdown of certain
high-cost manufacturing facilities; consolidation of redundant manufacturing
locations; workforce reductions, primarily operating personnel at certain
domestic and foreign facilities; and a more realistic balance between selling
prices and volumes. These measures are designed to improve manufacturing
capacity utilization, create operating efficiencies, and eliminate redundant
functions (see Note 4). It is the Company's goal to complete these programs by
the first quarter of 1998. These actions are expected to have a favorable effect
on future before tax annual earnings in the range of $20 million to $25 million,
beginning in 1998.*
The table below reflects results through profit from operations on an
adjusted basis. The 1997 results for the six months ended June 30, 1997, exclude
the effects of asset rationalization and impairment, severance, benefits, and
other adjustments aggregating $161 million (see Notes 4 and 13). 1996 has been
adjusted to exclude the results of operations of the aroma chemicals business
unit of the Food & Functional Products segment, the ink resins business unit of
the Chemical Specialties segment, and the Composite Products Division of the
Corporate and other segment, which were divested in 1996. Additionally, the
second quarter and six months ended June 30, 1996 have been further adjusted to
exclude an adjustment of $3 million related to spare parts inventories and a $2
million favorable settlement of an environmental remediation claim reported in
the Corporate and other segment. The table should make it easier to compare
quarter-over-quarter operating results. Accordingly, the discussion that follows
speaks to the comparisons in the table through profit from operations.
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales ....................................... $ 502 $ 504 $ 997 $ 969
Cost of sales ................................... 314 322 634 618
Selling, general, and administrative expenses ... 68 61 134 123
Research and development ........................ 14 14 27 27
Other operating expenses (income), net .......... (1) -- -- 1
----- ----- ----- -----
Profit from operations .......................... $ 107 $ 107 $ 200 $ 200
===== ===== ===== =====
Net Sales by Industry Segment
Chemical Specialties ....................... $ 267 $ 268 $ 539 $ 515
Food & Functional Products ................. 235 234 458 452
Corporate and other ........................ -- 2 -- 2
----- ----- ----- -----
Total ................................. $ 502 $ 504 $ 997 $ 969
===== ===== ===== =====
Profit (Loss) From Operations by Industry Segment
Chemical Specialties ....................... $ 49 $ 52 $ 100 $ 98
Food & Functional Products ................. 60 55 105 104
Corporate and other ........................ (2) 0 (5) (2)
----- ----- ----- -----
Total ................................. $ 107 $ 107 $ 200 $ 200
===== ===== ===== =====
</TABLE>
- ----------
* This paragraph contains forward looking statements and is included here
to provide safe harbor under the Private Securities Litigation Reform Act
of 1995.
12
<PAGE> 13
RESULTS OF OPERATIONS
Within the following discussion, unless otherwise stated, "quarter" and
"six-month period" refer to the second quarter of 1997 and the six months ended
June 30, 1997. All comparisons are with the corresponding periods in the
previous year unless otherwise stated.
Consolidated net sales were flat for the quarter and up $28
million, or 3%, for the six-month period. For the six-month period, Chemical
Specialties sales increased $24 million, or 5%, and Food & Functional Products
sales increased $6 million, or 1%. During the quarter and six-month period, both
segments reflect increased volumes, with Chemical Specialties reflecting higher
paper chemicals volumes, particularly in Europe, and increased volumes in both
rosin and hydrocarbon resins. Food & Functional Products volumes also increased,
particularly in Aqualon water soluble polymer applications in the paint and
construction markets. The favorable impact of these volume increases were
completely offset during the quarter, and partially offset during the six-month
period, by weaker foreign currencies relative to the dollar and lower prices.
The weaker foreign currencies impacted sales by $21 million and $38 million for
the quarter and six months, respectively.
Profit from operations on a consolidated and segment basis was
relatively flat for the quarter and six-month period. Profit improvement from
the increased volume noted above and manufacturing cost improvements were offset
by significantly weaker foreign currencies relative to the dollar, lower
prices, and increased selling, general, and administrative expenses. Profit was
$5 million and $8 million lower in the quarter and six-month period,
respectively, due to weaker currencies. Additionally, during the quarter, the
Chemical Specialties segment experienced higher costs attributable to
difficulties introducing new processes at several plants.
Equity in income of affiliated companies decreased $12 million and
$10 million for the quarter and six-month period, respectively. These declines
reflect the loss of equity earnings from Hercules' investment in Tastemaker,
which was monetized in March 1997 (see Notes 6 and 11).
Interest and debt expense increased for the quarter and six-month
period, principally due to higher average debt outstanding.
Other income, net increased $5 million and $328 million for the
quarter and six-month period, respectively (see Note 6).
The provision for income taxes for the six-month period ended June
30, 1997 reflects an estimated annual effective tax rate of 35%. The first
quarter rate was negatively impacted by a relatively high rate on the Tastemaker
transaction, along with required increases to tax reserves primarily related to
anticipated tax assessments by federal, state, and foreign tax authorities. The
1996 full-year rate of 33% was favorably impacted by utilization of tax loss
carryforwards.
13
<PAGE> 14
FINANCIAL CONDITION
Cash provided by operations was $63 million for the six-month
period, compared to $33 million for the corresponding 1996 period. Lower tax
payments primarily account for the improvement. 1996 included tax payments of
$36 million associated with the sale of a business unit in late 1995 and $25
million related to settlement of prior years' Federal income tax audits.
In March 1997 Hercules completed transactions to monetize its
investment in Tastemaker. According to the provisions of the transactions,
Hercules received approximately $103 million in cash, subject to post-closing
adjustments (see Notes 6 and 11). In addition, Hercules retained a $500 million,
five-year note, expected to be paid in three years, classified as held to
maturity. Management intends to increase leverage so that the net cash value of
the transaction to Hercules approximates $550 million. Cash will be utilized to
repurchase shares until and unless a more attractive investment appears.
Additionally, cash flow benefited by the liquidation of an investment for
approximately $32 million in cash, which approximated book value.
Short-term liquidity has remained stable since year-end 1996. Both
the current and quick ratios are relatively flat at .9 and .5, respectively. At
June 30, 1997, $88 million is available under short-term lines of credit. During
the six months, revolving credit agreements were increased from $380 million to
$700 million, of which $436 million was available at June 30, 1997. In addition,
in July 1997 Hercules increased the amount accessible under shelf registrations
from $50 million to $550 million; and in August, the Company issued $100 million
6.15% notes due August 1, 2000 and $100 million 6.60% debentures due August
1, 2027. The Company expects to use the proceeds from these issuances for the
repayment of commercial paper debt.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1993, Hercules and the U.S. Environmental Protection Agency
(EPA) Region 1 reached an agreement in principle in settlement of EPA's claims
that Hercules violated its wastewater permit with the City of Chicopee and the
Federal pretreatment standard for industrial users of publicly owned treatment
works at its Chicopee, Massachusetts, facility. Hercules signed a consent
Decree, which was entered by the court on December 15, 1994, based on this
agreement, requiring supplemental environmental projects (at a cost of
approximately $375,000), compliance with permit limits in the future, and
$250,000 in fines. Hercules has paid the $250,000 fine and is currently in the
process of performing the supplemental environmental projects, which are
expected to be completed in the third quarter of 1997.
Hercules received a letter from the New Jersey Department of
Environmental Protection (the "Department") dated March 9, 1995, which stated
that the Department was considering an enforcement action against Hercules for
alleged noncompliance with the terms of a 1993 Administrative Consent Order
("ACO") at its Kenvil, New Jersey, facility and other alleged violations. The
ACO covered alleged violations of the Air Pollution Control Act. The other
alleged violations were under the Spill Compensation and Control Act, the New
Jersey Water Pollution Control Act, and the New Jersey Safe Drinking Water Act.
On March 4, 1997 Hercules received from the Department a formal demand for
payment of stipulated penalties under the ACO as well as for civil penalties for
the other alleged violations. Hercules has reached an agreement in principle
with the Department and expects a settlement document to be finalized and
payment made during the third quarter 1997. The resolution of these penalties is
at a value that will not have a material impact on the Company's financial
condition.
Item 4. Submission of Matters to a Vote of Security-Holders.
The Company's Annual Meeting was held on April 24, 1997. Required
information has been supplied in registrant's Form 10-Q for the quarter ended
March 31, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
Hercules filed a report on Form 8-K on April 15, 1997
regarding the completion of transactions related to
Tastemaker, a 50% owned flavors joint venture.
In addition, an optional (Item 5 event) Form 8-K filing
was made on July 15, 1997 related to the formation of a
synthetic fibers joint venture between Hercules and Jacob
Holm & Sons A/S (Denmark), and disclosure of information
related to a qui tam action brought by a former employee.
15
<PAGE> 16
SIGNATURES
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.
Hercules Incorporated
by George MacKenzie
------------------------------
George MacKenzie
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer
and duly authorized signatory)
August 13, 1997
by Vikram Jog
------------------------------
Vikram Jog
Vice President and Controller
(Principal Accounting Officer)
August 13, 1997
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Hercules Incorporated 2Q97 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,000
<SECURITIES> 0
<RECEIVABLES> 395,000
<ALLOWANCES> 0
<INVENTORY> 238,000
<CURRENT-ASSETS> 690,000
<PP&E> 2,055,000
<DEPRECIATION> 1,392,000
<TOTAL-ASSETS> 2,498,000
<CURRENT-LIABILITIES> 813,000
<BONDS> 0
0
0
<COMMON> 79,000
<OTHER-SE> 784,000
<TOTAL-LIABILITY-AND-EQUITY> 2,498,000
<SALES> 997,000
<TOTAL-REVENUES> 997,000
<CGS> 634,000
<TOTAL-COSTS> 958,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,000
<INCOME-PRETAX> 388,000
<INCOME-TAX> 205,000
<INCOME-CONTINUING> 183,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 183,000
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 0
</TABLE>
