<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 September 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 October 31, 1997, 96,602,637 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 Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1997 1996 1997 1996
----------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales............................................................. $448 $518 $1,445 $1,566
Cost of sales......................................................... 270 327 905 1,006
Selling, general, and administrative expenses......................... 58 64 192 196
Research and development.............................................. 13 14 41 42
Other operating expenses (income), net................................ -- (14) 162 (20)
------ ----- ----- --------
Profit from operations................................................ 107 127 145 342
Equity in income of affiliated companies.............................. 4 12 25 42
Interest and debt expense............................................. 10 9 29 26
Other income (expense), net........................................... 22 (2) 370 18
------ ------ ----- -------
Income before taxes................................................... 123 128 511 376
Provision for income taxes............................................ 41 43 246 127
------ ------ ----- -------
Net income............................................................ $ 82 $ 85 $265 $ 249
===== ======= ==== =====
Earnings per share ................................................... $ .82 $ .80 $2.62 $2.31
===== ======= ===== =====
Dividends per share................................................... $0.25 $0.23 $0.75 $0.69
===== ====== ===== =====
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
-------------- ------------
1997 1996
--------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 23 $ 30
Accounts and notes receivable, net..................... 388 394
Inventories
Finished products................................... 117 154
Materials, supplies, and work in process............ 119 125
Deferred income taxes.................................. 36 36
------ ------
Total current assets................................ 683 739
Property, plant, and equipment.......................... 2,057 2,349
Accumulated depreciation and amortization............... 1,392 1,484
------ ------
Net property, plant, and equipment.................. 665 865
Investments............................................. 716 364
Other assets............................................ 433 418
------ ------
Total assets........................................ $2,497 $2,386
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 110 $ 140
Accrued expenses....................................... 306 221
Short-term debt........................................ 192 313
Income taxes payable................................... 92 20
------ ------
Total current liabilities........................... 700 694
Long-term debt.......................................... 461 345
Deferred income taxes................................... 171 129
Postretirement benefits and other liabilities........... 374 331
Stockholders' equity:
Common stock (shares issued: 1997--154,353,823;
1996--152,269,076).................................. 80 79
Additional paid-in capital............................. 502 493
Foreign currency translation adjustment................ (2) 45
Retained earnings...................................... 2,133 1,942
------ ------
2,713 2,559
Reacquired stock, at cost (shares: 1997--55,560,667;
1996--50,866,562)................................... 1,922 1,672
------ ------
Total stockholders' equity.......................... 791 887
------ ------
Total liabilities and stockholders' equity.......... $2,497 $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)
Nine Months Ended Sept. 30,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided by operations..................................... $141 $165
----- ----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures................................................ (77) (78)
Proceeds of investment and fixed asset disposals.................... 144 155
Other, net.......................................................... (7) (1)
----- ------
Net cash provided by investing activities..................... 60 76
----- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds............................................. 342 13
Long-term debt repayments........................................... (91) (25)
Change in short-term debt........................................... (122) 131
Common stock reissued............................................... 32 13
Common stock reacquired............................................. (294) (345)
Dividends paid...................................................... (74) (73)
------- -------
Net cash used in financing activities......................... (207) (286)
------ ------
Effect of exchange rate changes on cash............................. (1) (1)
------ -------
Net (decrease) in cash and cash equivalents......................... (7) (46)
Cash and cash equivalents - beginning of period..................... 30 73
----- -----
Cash and cash equivalents - end of period........................... $ 23 $ 27
===== ====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized).......................... $ 16 $ 22
Income taxes ................................................. 106 127
Noncash investing and financing activities:
Conversion of notes and debentures............................ 31 --
Accounts payable for common stock acquisitions................ 25 11
Incentive plan stock issuances................................ 2 15
Investment in long-term note.................................. 500 1
Accounts receivable from sale of
investments/asset disposals.............................. -- 11
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. These condensed financial statements are unaudited, but in the opinion
of management include all adjustments (consisting of only normal accruals
except as discussed in Notes 4 and 6) 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 average number
of common and common equivalent shares of 100,252,116 for the quarter ended
September 30, 1997; 101,384,586 for the nine months ended September 30, 1997;
105,886,331 for the quarter ended September 30, 1996; and 108,042,269 for the
nine months ended September 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 assume conversion
of the 8% convertible subordinated debentures, are not materially different from
primary earnings per share. In the fully diluted computation, the number of
shares is increased by 1,710,578 for the quarter ended September 30, 1997;
2,390,833 for the nine months ended September 30, 1997; 2,736,959 for the
quarter ended September 30, 1996; and 2,740,610 for the nine months ended
September 30, 1996. Net income is further adjusted in the quarter and nine-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>
(Dollars in millions) September 30,
-------------------------
1997 1996
-------- ---------
<S> <C> <C>
Three months ended..................... $16 $22
Nine months ended...................... 57 83
</TABLE>
4. Other operating expenses for the nine months ended September 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
5
<PAGE> 6
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 $16 million is the remaining liability at September 30,
1997. Under the plan, approximately 260 employees will be terminated. The plan
includes reorganization of management, reductions in operating 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 nine months
ended September 30, 1996, include probable recoveries related to environmental
remediation of $13 million. Additionally, the nine-month period includes
reduction in the estimated loss on the divestiture of the Composite Products
Division of $5 million.
5. Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in millions) September 30,
------------------------
1997 1996
-------- -------
<S> <C> <C>
Three Months Ended:
Costs incurred........................... $11 $10
Amount capitalized....................... 1 1
--- ---
Interest expense......................... $10 $ 9
=== ===
Nine Months Ended:
Costs incurred........................... $33 $30
Amount capitalized....................... 4 4
--- ---
Interest expense......................... $29 $26
=== ===
</TABLE>
6. Other income, net for the quarter and nine months ended September 30,
1997 includes net foreign currency gains of $3 million and $17 million,
respectively, and interest income, primarily related to the $500 million note
(see Note 11) of $10 million and $20 million, respectively. Additionally, the
nine months reflect a gain of $364 million, of which $7 million was recognized
in the quarter, 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 nine months ended September 30, 1996, reflects
net foreign currency gains of $8 million and gains on sales of real estate of
$11 million.
7. Dividends received from affiliated companies accounted for on the equity
method were $0 for the quarter and nine months ended September 30, 1997 and $2
million and $8 million for the quarter and nine months ended September 30, 1996,
respectively.
6
<PAGE> 7
8. A summary of short-term and long-term debt follows:
<TABLE>
<CAPTION>
(Dollars in millions) September 30, December 31,
------------- ------------
1997 1996
------------- ------------
<S> <C> <C>
SHORT-TERM:
Commercial paper........................ $140 $265
Banks................................... 52 48
Current maturities...................... -- --
---- ----
$192 $313
==== ====
</TABLE>
At September 30, 1997, Hercules had $181 million of unused lines of credit that
may be drawn as needed. Lines of credit in use or supporting commercial paper at
September 30, 1997, were $58 million.
<TABLE>
<C> <C> <C>
LONG-TERM:
6.15% notes due 2000.................................... $100 $ --
6.60% notes due 2027.................................... 100 --
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......... 10 41
Commercial paper........................................ 50 50
Variable rate loans..................................... 41 93
Other .................................................. 8 9
---- ----
.................................................. 461 345
Current maturities of long-term debt.................... -- --
---- ----
Net long-term debt...................................... $461 $345
==== ====
</TABLE>
9. Interest Rate Risk Management
During the nine-month period ended September 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 September 30, 1997 was $650 million.
The following table indicates the type of swaps used and their
weighted-average interest rates:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996
---------- ---------
<S> <C> <C>
PAY FIXED ON SWAPS
Notional amount (at period-end).............. $650 $125
Average pay rate............................. 6.5% 6.1%
Average receive rate......................... 5.7% 5.5%
</TABLE>
7
<PAGE> 8
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
September 30, 1997, a total of 61,098,995 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 $36.49 per share.
11. In March 1997, the Company completed transactions to monetize its
investment in Tastemaker for approximately $608 million, including $108 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 $8 million
for the quarters ended September 30, 1997 and 1996, respectively, and $11
million and $27 million for the nine months ended September 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 owns 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 nine months ended September 30, 1997, were
$84 million and $(28) million, respectively. For the quarter and nine months
ended September 30, 1996, net sales and operating profit were $49 million and $7
million, respectively, and $132 million and $14 million, respectively.
In October 1997, Hercules entered into an agreement with Alliant
Techsystems providing for the disposition of 3.86 million shares of Alliant
common stock held by Hercules, at an anticipated gain, for approximately $230
million in cash. Under the agreement, 2.82 million shares will be sold through
a public stock offering. Additionally, under the terms of the agreement, if the
public offering price is less than $58 per share, Hercules will not be
obligated to proceed with the offering or the subsequent disposition of the
remaining 1.04 million shares. The offering is expected to close in 1997 but no
later than January 15, 1998. The remaining 1.04 million shares will be subject
to a put/call arrangement between Hercules and Alliant and will result in
Hercules selling the remaining shares to Alliant in four equal installments
during 1998. The price for shares purchased under the put/call arrangement will
be equal to the per share net proceeds realized by Hercules in the public
offering, plus simple interest at a rate of 6.25% per year. Equity in income
of affiliated companies includes Alliant's earnings of $3 million and $4
million for the quarters ended September 30, 1997 and 1996, respectively, and
$12 million and $14 million for the nine months ended September 30, 1997 and
1996, 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 September 30, 1997, the Company's earnings per
share would approximate the pro-forma amounts below:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----- ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS........................... $.82 $.81 $2.65 $2.35
Diluted EPS......................... $.81 $.79 $2.57 $2.27
</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
8
<PAGE> 9
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.
13. Commitments and Contingencies
(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
$77 million and $240 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. A trial on
allocation of liability and damages among Hercules, Uniroyal, and the
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<PAGE> 10
United States will begin in June 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 $25 million and $99 million. These costs are based
on Hercules' assessment of potential liability, the level of participation by
other PRPs, and current estimates of remediation costs.
At September 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
1998. 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.
10
<PAGE> 11
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 and Hercules 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, 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.
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<PAGE> 12
OTHER FINANCIAL INFORMATION
Operational highlights
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1997 1996 1997 1996
-------- ------- ------- --------
<S> <C> <C> <C> <C>
NET SALES BY INDUSTRY SEGMENT
Chemical Specialties........................................ $217 $280 $ 755 $ 807
Food & Functional Products.................................. 231 237 689 707
Corporate and Other......................................... -- 1 1 52
---- ---- ------ ------
Total.................................................. $448 $518 $1,445 $1,566
==== ==== ====== ======
PROFIT (LOSS) FROM OPERATIONS BY INDUSTRY SEGMENT
Chemical Specialties........................................ $ 41 $ 55 $ 44 $ 153
Food & Functional Products.................................. 67 60 124 169
Corporate and Other......................................... (1) 12 (23) 20
---- ---- ------ ------
Total.................................................. $107 $127 $ 145 $ 342
==== ==== ====== ======
</TABLE>
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<PAGE> 13
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 nine months ended September 30, 1997,
exclude the effects of asset rationalization and impairment, severance,
benefits, and other adjustments aggregating $161 million (see Notes 4 and 13).
Additionally, 1997 has been further adjusted to exclude the results of
operations of the Fibers Division of the Chemical Specialties segment, which was
joint ventured in June 1997. 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 third quarter ended September 30,
1996 has been adjusted to exclude $13 million of probable environmental
recoveries reported in the Corporate and other segment and the nine months ended
September 30, 1996 further reflects the elimination 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales...................................................... $448 $455 $1,361 $1,340
Cost of sales.................................................. 270 279 837 831
Selling, general, and administrative expenses.................. 58 58 184 173
Research and development....................................... 13 12 39 37
Other operating expenses (income), net......................... -- -- 2 (1)
---- ---- ---- ----
Profit from operations......................................... $107 $106 $299 $300
==== ==== ==== ====
Net Sales by Industry Segment
Chemical Specialties...................................... $217 $225 $671 $656
Food & Functional Products................................ 231 229 689 680
Corporate and other....................................... -- 1 1 4
---- ---- ---- ----
Total................................................ $448 $455 $1,361 $1,340
==== ==== ====== ======
Profit (Loss) From Operations by Industry Segment
Chemical Specialties...................................... $ 41 $ 48 $133 $ 140
Food & Functional Products................................ 67 58 172 163
Corporate and other....................................... (1) -- (6) (3)
---- ---- ---- ----
Total................................................ $107 $106 $299 $300
==== ==== ==== ====
</TABLE>
- --------------------------
* This paragraph contains forward looking statements and is included here to
provide safe harbor under the Private Securities Litigation Reform Act of
1995.
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<PAGE> 14
RESULTS OF OPERATIONS
Within the following discussion, unless otherwise stated, "quarter" and
"nine-month period" refer to the third quarter of 1997 and the nine months ended
September 30, 1997. All comparisons are with the corresponding periods in the
previous year.
Consolidated net sales decreased $7 million, or 2%, for the quarter,
while increasing $21 million, or 2%, for the nine-month period. For the quarter,
Chemical Specialties sales decreased $8 million, or 4%, while Food & Functional
Products remained virtually flat. For the nine-month period, Chemical
Specialties sales increased $15 million, or 2%, while Food & Functional Products
increased $9 million, or 1%. The quarter and nine months reflect increased
volume in both segments, with Chemical Specialties reflecting higher paper
chemicals volumes, particularly in Europe, on increased market share and
increased volumes in both rosin and hydrocarbon resins. Food & Functional
Products volume also increased, particularly in Aqualon water-soluble polymer
applications in the paint and construction markets. Additionally, increased
volume in pectin and carrageenan, particularly in the quarter, contributed to a
favorable volume variance in food gums. The favorable impact of these volume
improvements was completely offset during the quarter and partially offset
during the nine-month period, by weaker foreign currencies relative to the
dollar and lower prices. The weaker foreign currencies impacted sales by $29
million and $67 million for the quarter and nine months, respectively.
Profit from operations on a consolidated and segment basis was
relatively flat for the quarter and nine-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 and lower
prices. Additionally, higher selling, general, and administrative expenses
negatively impacted the nine-month period. Profit was $7 million and $15 million
lower in the quarter and nine-month period, respectively, due to weaker
currencies. The Chemical Specialties segment has experienced higher
manufacturing costs in several resins plants coming from the introduction of
new processes and operability issues since the second quarter of 1997. Work is
underway to address these issues, however higher costs could impact the fourth
quarter.
Equity in income of affiliated companies decreased $8 million and $17
million for the quarter and nine-month period, respectively. These declines
primarily 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 nine-month
period, principally due to higher average debt outstanding.
14
<PAGE> 15
Other income, net increased $24 million and $352 million for the quarter
and nine-month period, respectively (see Note 6).
The provision for income taxes for the nine-month period ended September
30, 1997 reflects an estimated annual effective tax rate of 34.5%. 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.
FINANCIAL CONDITION
Cash provided by operations was $141 million for the nine-month period,
compared to $165 million for the corresponding 1996 period. The decrease
primarily relates to lower trade payables, severance payments (see Note 4), and
higher legal and environmental spending, partially offset by lower tax
payments.
In March 1997 Hercules completed transactions to monetize its investment
in Tastemaker. According to the provisions of the transactions, Hercules
received approximately $108 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 is being 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.
In October 1997, Hercules entered into an agreement with Alliant
Techsystems providing for the disposition of 3.86 million shares of Alliant
common stock held by Hercules, at an anticipated gain, for approximately $230
million in cash. Under the agreement, 2.82 million shares will be sold through
a public stock offering. Additionally, under the terms of the agreement, if the
public offering price is less than $58 per share, Hercules will not be
obligated to proceed with the offering or the subsequent disposition of the
remaining 1.04 million shares. The offering is expected to close in 1997 but no
later than January 15, 1998. The remaining 1.04 million shares will be subject
to a put/call arrangement between Hercules and Alliant and will result in
Hercules selling the remaining shares to Alliant in four equal installments
during 1998. The price for shares purchased under the put/call arrangement will
be equal to the per share net proceeds realized by Hercules in the public
offering, plus simple interest at a rate of 6.25% per year.
Additionally, during the quarter, Hercules restructured its property
damage and business interruption insurance, reducing the deductible to $25
million from $50 million while enhancing coverage and maintaining premium costs.
Short-term liquidity has remained stable since year-end 1996. Both the
current and quick ratios are relatively flat at 1.0 and .6, respectively. At
September 30, 1997, $181 million is available under short-term lines of credit.
During the nine months, revolving credit agreements were increased from $380
million to $700 million, of which $510 million was available at September 30,
1997. In addition, Hercules increased the amount accessible under shelf
registrations from $50 million to $300 million, and 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.
15
<PAGE> 16
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 the 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 has completed
performance of the supplemental environmental projects. Hercules has begun to
initiate those actions necessary to obtain court approval for the termination of
the Consent Decree.
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 finalized an agreement in principle with
the Department and payment was made during the fourth quarter 1997.
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 was not required to file any reports on Form 8-K for the
quarter ended September 30, 1997.
16
<PAGE> 17
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)
November 14, 1997
by Vikram Jog
---------------------------------------
Vikram Jog
Vice President and Controller
(Principal Accounting Officer)
November 14, 1997
17
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