<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 March 31, 2000
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 April 30, 2000, 107,198,197 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 March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net sales ........................................... $ 785 $ 791
Cost of sales ....................................... 437 423
Selling, general, and administrative expenses ....... 197 197
Research and development ............................ 21 21
Goodwill and intangible asset amortization .......... 20 20
Other operating expenses, net ....................... 4 7
----- -----
Profit from operations .............................. 106 123
Equity in income of affiliated companies ............ -- 1
Interest and debt expense ........................... 32 60
Preferred security distributions of subsidiary trusts 23 5
Other income, net ................................... 5 3
----- -----
Income before income taxes .......................... 56 62
Provision for income taxes .......................... 20 24
----- -----
Net income .......................................... $ 36 $ 38
===== =====
Earnings per share:
Basic ........................................ $0.34 $0.37
===== =====
Diluted ...................................... $0.34 $0.37
===== =====
Dividends per share ................................. $0.27 $0.27
===== =====
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ..................... $ 85 $ 63
Accounts and notes receivable, net ............ 621 635
Other current assets .......................... 95 131
Inventories
Finished products ...................... 202 187
Materials, supplies, and work in process 187 193
Deferred income taxes ......................... 140 129
------- -------
Total current assets .......................... 1,330 1,338
Property, plant, and equipment ....................... 2,970 2,978
Accumulated depreciation and amortization ............ 1,666 1,657
------- -------
Net property, plant, and equipment ................... 1,304 1,321
Goodwill and other intangible assets (net of
accumulated amortization - 2000, $150; 1999,
$130) .............................................. 2,540 2,570
Other assets ......................................... 677 667
------- -------
Total assets .................................. $ 5,851 $ 5,896
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .............................. $ 234 $ 320
Accrued expenses .............................. 468 526
Short-term debt ............................... 643 678
Income taxes payable .......................... 47 35
------- -------
Total current liabilities ..................... 1,392 1,559
Long-term debt ....................................... 1,898 1,777
Deferred income taxes ................................ 288 287
Postretirement benefits and other liabilities ........ 406 418
Company-obligated preferred securities of
subsidiary trusts ............................... 992 992
Stockholders' equity
Common stock (shares issued: 2000 -
159,982,318; 1999 - 159,976,730) ........... 83 83
Additional paid-in capital .................... 744 757
Unearned compensation ......................... (123) (123)
Other comprehensive losses .................... (48) (44)
Retained earnings ............................. 2,133 2,125
------- -------
2,789 2,798
Reacquired stock, at cost (shares: 2000 -
53,039,073; 1999 - 53,587,365) ............ 1,914 1,935
------- -------
Total stockholders' equity .................... 875 863
------- -------
Total liabilities and stockholders' equity .... $ 5,851 $ 5,896
======= =======
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
(Dollars in millions) (Unaudited)
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net cash (used in) provided by operations ....................... $ (12) $ 13
----- -----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures ............................................ (52) (38)
Proceeds of investment and fixed asset disposals ................ 6 --
Other, net ...................................................... (20) (5)
----- -----
Net cash used in investing activities .................... (66) (43)
----- -----
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds ......................................... 200 27
Long-term debt repayments ....................................... (72) (543)
Change in short-term debt ....................................... (2) 203
Payment of underwriting fees .................................... -- (11)
Proceeds from issuance of subsidiary trust's preferred securities -- 362
Common stock issued ............................................. 3 --
Common stock reacquired ......................................... (1) --
Dividends paid .................................................. (28) (27)
----- -----
Net cash provided by financing activities ................ 100 11
----- -----
Effect of exchange rate changes on cash ......................... -- (3)
----- -----
Net (decrease) increase in cash and cash equivalents ............ 22 (22)
Cash and cash equivalents - beginning of period ................. 63 68
----- -----
Cash and cash equivalents - end of period ....................... $ 85 $ 46
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) ..................... $ 33 $ 71
Preferred security distributions of subsidiary trusts .... 18 4
Income taxes ............................................. 11 5
Noncash investing and financing activities:
Incentive plan stock issuances ........................... 6 --
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Unaudited)
(Dollars in millions) Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net income.............................................................. $ 36 $ 38
Foreign currency translation, net of tax................................ (4) (10)
------ -------
Comprehensive income.................................................... $ 32 $ 28
====== =======
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
HERCULES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. These condensed financial statements are unaudited, but in the opinion of
management include all adjustments necessary to present fairly Hercules'
financial position and results of operations for interim periods. These
condensed financial statements should be read in conjunction with the accounting
policies, financial statements, and notes included in our annual report on Form
10-K for the year ended December 31, 1999. Certain prior period amounts have
been reclassified to conform to the current period presentation.
2. Revenue Recognition - Revenue is recognized generally upon shipment of goods
and passage of title. Service revenue is recognized as services are performed.
3. The following table shows the amounts used in computing earnings per share
(EPS) and the effect on income and the weighted-average number of shares of
dilutive potential common stock:
(Amounts are in millions,
except per share data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Basic
Net income ........................ $ 36 $ 38
Weighted-average shares outstanding 106.7 100.8
-------- --------
EPS ............................... $ 0.34 $ 0.37
======== ========
Diluted
Net income ........................ $ 36 $ 38
Interest on convertible debentures -- --
-------- --------
Net income for EPS calculation .... $ 36 $ 38
======== ========
Weighted-average shares outstanding 106.7 100.8
Options ........................... -- .4
Debentures ........................ .2 .3
-------- --------
Adjusted weighted-average shares .. 106.9 101.5
-------- --------
EPS ............................... $ 0.34 $ 0.37
======== ========
</TABLE>
4. Cost and expenses include depreciation of $33 million and $34 million for the
three months ended March 31, 2000 and 1999, respectively.
5. Other operating expenses for the three months ended March 31, 2000 and 1999
include integration charges of $2 million and $7 million, respectively,
primarily for employee retention, consulting, legal and other costs associated
with the BetzDearborn acquisition. Additionally, environmental charges of
approximately $2 million and $1 million, respectively, were also incurred during
the corresponding periods.
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6. Interest and debt costs are summarized as follows:
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Costs incurred........................................................ $ 34 $ 62
Amount capitalized.................................................... 2 2
---- ----
Interest expense...................................................... $ 32 $ 60
==== ====
</TABLE>
7. Other income includes interest income of approximately $2 million for each of
the three months ended March 31, 2000 and 1999, respectively. Additionally, the
three months ended March 31, 2000 includes foreign currency gains of
approximately $3 million.
8. The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs, primarily related to the 1998 plans initiated
upon the acquisition of BetzDearborn. We estimate approximately 1,300 employees
will be terminated, of which approximately 1,050 employee terminations have
occurred since the inception of the plans.
Pursuant to the plans in place, approximately 60 employees were
terminated during the three months ended March 31, 2000. Cash payments during
2000 included $7 million for severance benefits and $2 million for other exit
costs. A reconciliation of activity with respect to the liabilities established
for these plans is as follows:
<TABLE>
(Dollars in millions) Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of year..................................... $ 77 $130
Cash payments............................................. (9) (6)
---- ----
Balance at end of period......................................... $ 68 $124
==== ====
</TABLE>
Severance benefit payments are based on years of service and generally
continue for 3 months to 24 months subsequent to termination. We expect to
substantially complete remaining actions under the plans by the end of 2000.
9. A summary of short-term and long-term debt follows:
<TABLE>
<CAPTION>
(Dollars in millions) March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
SHORT-TERM:
Banks..................................................................... $ 24 $ 26
Current maturities........................................................ 619 652
---- ----
$643 $678
==== ====
</TABLE>
7
<PAGE> 8
At March 31, 2000, we had $308 million of unused lines of credit that
may be drawn as needed. Lines of credit in use at March 31, 2000 were $24
million.
<TABLE>
<CAPTION>
(Dollars in millions) March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
LONG-TERM:
6.15% notes due 2000...................................................... $ 100 $ 100
6.60% notes due 2027...................................................... 100 100
7.85% notes due 2000...................................................... -- 25
6.625% notes due 2003..................................................... 125 125
8% convertible subordinated debentures due 2010........................... 3 3
Term loan tranche A due in varying amounts through 2003................... 1,149 1,187
Term loan tranche C due 2000.............................................. 318 318
Revolving credit agreement due 2003....................................... 536 336
ESOP debt due in varying amounts through 2009............................. 105 106
Term notes at various rates from 4.20% to 9.60% due in varying amounts
through 2006............................................................. 74 80
Variable rate loans....................................................... -- 41
Other..................................................................... 7 8
------ ------
2,517 2,429
Current maturities of long-term debt...................................... (619) (652)
------ ------
Net long-term debt........................................................ $1,898 $1,777
====== ======
</TABLE>
In 1998, we entered into a $3,650 million credit facility with a
syndicate of banks which includes varying maturity term loans totaling $2,750
million, of which $1,467 million is still outstanding at March 31, 2000. In
addition, the facility includes a $900 million revolving credit agreement, of
which $536 million is outstanding at March 31, 2000. Through this revolving
credit facility, a Canadian subsidiary of ours can borrow up to U.S. $100
million from select lenders in Canada in Canadian dollars. As of March 31, 2000,
$364 million of the multi-currency revolver is available for use.
10. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures consists of:
<TABLE>
<CAPTION>
(Dollars in millions) March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Redeemable Hybrid INcome Overnight Shares............................. $200 $200
9.42% Trust Originated Preferred Securities........................... 362 362
6-1/2% CRESTS Units................................................... 260 260
Floating Rate Preferred Securities.................................... 170 170
---- ----
$992 $992
==== ====
</TABLE>
REDEEMABLE HYBRID INCOME OVERNIGHT SHARES
In November 1998, Hercules Trust V, our wholly owned subsidiary ("Trust
V"), completed a private placement of $200 million Redeemable Hybrid INcome
Overnight Shares (RHINOS). RHINOS are short-term auction-rate reset preferred
securities of Trust V, which used the proceeds from the RHINOS sale to purchase
junior subordinated notes of Hercules. Hercules pays interest on the junior
subordinated notes, and Trust V pays distributions on the RHINOS at a floating
rate initially equal to LIBOR plus 1.75%, which is reset on a quarterly basis.
The RHINOS are guaranteed by Hercules.
Pursuant to amendments to the RHINOS agreements executed on January 24,
2000, the redemption date of the RHINOS was extended from January 25, 2000 to
February 28, 2000.
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<PAGE> 9
Pursuant to amendments to the RHINOS agreements executed on February 9,
2000: (1) the interest rate on the RHINOS was reduced to LIBOR plus 1.5%, and
(2) the RHINOS may be remarketed at any time at the option of the holder. If the
holder elects to initiate a remarketing, Hercules and Trust V have the right to
redeem the RHINOS at a price equal to the aggregate liquidation amount of the
RHINOS, plus accumulated and unpaid distributions. Upon a successful
remarketing, the redemption date of the RHINOS will be extended for an
additional year. If the RHINOS are not remarketed, they will be redeemed by
Hercules and Trust V on February 9, 2002. Hercules paid an affiliate of the
holder an extension fee of 2.25% of the aggregate liquidation amount of the
RHINOS at the time of the February 2000 amendment.
TRUST ORIGINATED PREFERRED SECURITIES
In March 1999, Hercules Trust I, our wholly owned subsidiary trust
("Trust I"), completed a $362 million underwritten public offering of 14,500,000
shares of 9.42% Trust Originated Preferred Securities. Trust I invested the
proceeds from the sale of the Preferred Securities in an equal principal amount
of 9.42% Junior Subordinated Deferrable Interest Debentures of Hercules due
March 2029.
Trust I will distribute quarterly cash payments it receives from
Hercules on the debentures to its preferred security holders at an annual rate
of 9.42% on the liquidation amount of $25 per preferred security. We may defer
interest payments on the debentures at any time, for up to 20 consecutive
quarters. If this occurs, Trust I will also defer distribution payments on its
preferred securities. The deferred distributions, however, will accumulate
distributions at a rate of 9.42% per annum.
Trust I will redeem its preferred securities when the debentures are
repaid at maturity on March 31, 2029. Hercules may redeem the debentures, in
whole or, on or after March 17, 2004, in part, before their maturity at a price
equal to 100% of the principal amount of the debentures redeemed, plus accrued
interest. When Hercules redeems any debentures before their maturity, Trust I
will use the cash it receives to redeem preferred securities and common
securities as provided in the trust agreement. Hercules guarantees the
obligations of Trust I on the preferred securities.
CRESTS UNITS
In July 1999, we completed a $350 million public offering of 350,000
CRESTS Units with Hercules Trust II, a wholly owned subsidiary trust ("Trust
II"). Trust II used the proceeds from the sale of its preferred securities to
purchase junior subordinated deferrable interest debentures of Hercules. Each
CRESTS Unit consists of one preferred security of Trust II and one warrant to
purchase 23.4192 shares of Hercules common stock at an initial exercise price of
$1,000 (equivalent to $42.70 per share). The preferred security component of the
CRESTS Units was initially valued at $741.46 per unit and the warrant component
of the CRESTS Units was initially valued at $258.54 per warrant. The preferred
security and warrant components of each CRESTS Unit may be separated and
transferred independently. The warrants may be exercised, subject to certain
conditions, at any time before March 31, 2029, unless there is a reset and
remarketing event. No reset and remarketing event will occur before July 27,
2004, unless all of our common stock is acquired in a transaction that includes
cash for a price above a predetermined level. As of March 31, 2000, no warrants
had been exercised.
We pay interest on the debentures, and Trust II pays distributions on
its preferred securities. Both are paid quarterly at an annual rate of 6.5% of
the scheduled liquidation amount of $1,000 per debenture and/or preferred
security until the scheduled maturity date and redemption date of June 30, 2029,
unless there is a reset and remarketing event. We may defer interest payments on
the debentures at any time, for up to 20 consecutive quarters. If this occurs,
Trust II will also defer distribution payments on its preferred securities. The
deferred distributions will accumulate distributions at a rate of 6.5% per
annum. We guarantee payments by Trust II on its preferred securities. Trust II
must redeem the preferred securities when the debentures are redeemed or repaid
at maturity.
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<PAGE> 10
Issuance costs related to the preferred security component of the
CRESTS Units are being amortized over the life of the security and costs related
to the warrants were charged to additional paid-in capital.
FLOATING RATE PREFERRED SECURITIES
In December 1999, Hercules Trust VI, our wholly owned subsidiary trust
("Trust VI"), completed a $170 million private offering of 170,000 shares of
Floating Rate Preferred Securities. Trust VI invested the proceeds from the sale
of its preferred securities in an equal principal amount of Floating Junior
Subordinated Deferrable Interest Debentures due 2000 of Hercules.
Trust VI will distribute quarterly cash payments it receives from
Hercules on the debentures to its preferred security holders at an annual rate
of LIBOR plus 2.45%, which is reset on a quarterly basis, on the liquidation
amount of $1,000 per preferred securities. We may defer interest payments on the
debentures at any time during the term of the preferred securities. If this
occurs, Trust VI will also defer distribution payments on the preferred
securities. The deferred distributions, however, will accumulate distributions
at a rate of LIBOR plus 2.45%.
Trust VI will redeem the preferred securities when the debentures are
repaid at maturity on December 29, 2000. Hercules guarantees the obligations of
Trust VI on the preferred securities.
11. The Board of Directors has authorized the repurchase of up to 74,650,000
shares of our common stock. Of this amount, 6,150,000 shares are intended for
various employee benefit programs. Through March 31, 2000, a total of 66,656,052
shares (including 6,150,000 shares for employee benefit programs) had been
purchased in the open market at an average price of $37.30 per share.
12. In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
This statement, as amended by Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet determined the impact
that the adoption of SFAS 133 will have on its earnings or statement of
financial position.
13. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
Hercules has been identified as a potentially responsible party (PRP)
by U.S. federal and state authorities, or by private parties seeking
contribution, for the cost of environmental investigation and/or cleanup at
numerous sites. The estimated range of the reasonably possible share of costs
for the investigation and cleanup is between $59 million and $228 million. The
actual costs will depend upon numerous factors, including the number of parties
found responsible at each environmental site and their ability to pay; the
actual methods of remediation; outcomes of negotiations with regulatory
authorities; outcomes of litigation; changes in environmental laws and
regulations; technological developments; and the years of remedial activity
required, which could range from 0 to 30 years.
Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency, or other government agencies, or through
correspondence from previously named PRPs, who either request information or
notify us of our potential liability. We have established procedures for
identifying environmental issues at our plant sites. In addition to
environmental audit programs, we have
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environmental coordinators who are familiar with environmental laws and
regulations and act as a resource for identifying environmental issues.
United States v. Vertac Chemical Corporation, USDA No. LR-C-92-137 (E.D. Ark.)
We refer you to our Annual Report on Form 10-K for the period ended
December 31, 1999 for a discussion of the ongoing litigation over liability at
the Jacksonville, Arkansas site. As previously disclosed in our Form 10-K, we
appealed final judgments on liability and the allocation of response costs
between Uniroyal and Hercules. Oral argument before the United States Court of
Appeals for the Eighth Circuit is presently scheduled for June 2000.
Hercules Incorporated v. The Aetna Casualty & Surety Company, et al., Del.
Super., C.A. No. 92C-10-105 and 90C-FE-195-CV (consolidated)
In 1992, Hercules brought suit against its insurance carriers for past
and future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas site (see
discussion above) was completed. The jury returned a "Special Verdict Form" with
findings that, in conjunction with the Court's other opinions, were used by the
Court to enter a judgment in August 1999. The judgment determined the amount of
Hercules' recovery for past cleanup expenditures and stated that Hercules is
entitled to similar coverage for costs incurred since September 30, 1997, and in
the future. Hercules has not included any insurance recovery in the estimated
range of costs above. Since entry of the Court's August 1999 order, Hercules has
entered into settlement agreements with several of its insurance carriers and
has recovered certain settlement monies. The terms of those settlements and
amounts recovered are confidential. Recently, Hercules filed a notice to appeal
certain of the trial court's rulings with the Delaware Supreme Court.
Brunswick, Georgia Consent Order and Related Matters
We refer you to our Annual Report on Form 10-K for the period ended
December 31, 1999, for a discussion on the Brunswick, Georgia, consent order and
related matters.
At March 31, 2000, the accrued liability of $59 million 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 process of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. Hercules 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.
LITIGATION
We refer you to our Annual Report on Form 10-K for the period ended
December 31, 1999 for a discussion of the following cases: Coley, et al. v.
Hercules Incorporated, et al., No. 98 VSO 140933B (Fulton County, Georgia);
Thomas & Thomas Rodmakers v. Newport Adhesives and Composites, Case No.
CV-99-07796-GHK (U.S. District Court, Central District of California); and Chang
Ok-Lee, Individually and as Representative of a Class and Thomas Wolfe,
Individually and as Representative of a Class v. Dow Chemical Co., et al., Civil
Action No. 99-6127 (U.S. District Court, Eastern District of Pennsylvania).
Since the filing of our Form 10-K, the court in the Coley case dismissed the
other co-defendants, Georgia-Pacific and AlliedSignal, without prejudice.
Otherwise, there have been no material developments in the ongoing litigation
matters referred to above.
At March 31, 2000, the consolidated balance sheet reflects a current
liability of approximately $27 million for litigation (including claims but
excluding matters covered in the Environmental section of this Report). This
amount represents management's best estimate of the probable
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<PAGE> 12
and reasonably estimable losses related to litigation. The extent of the
liability is evaluated quarterly. While it is not feasible to predict the
outcome of pending litigation, Hercules does not anticipate that its financial
condition will be materially affected by the ultimate resolution of pending
litigation in excess of amounts accrued, although quarterly or annual operating
results could be materially affected.
14. SEGMENT INFORMATION
<TABLE>
<CAPTION>
(Dollars in millions)
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net Sales:
Process Chemicals and Services........................ $413 $412
Functional Products................................... 202 208
Chemical Specialties.................................. 171 171
Reconciling Items..................................... (1) --
---- ----
Consolidated................................... $785 $791
==== ====
Profit (Loss) from Operations:
Process Chemicals and Services........................ $ 77 $ 78
Functional Products................................... 52 54
Chemical Specialties.................................. 16 26
Reconciling Items..................................... (39)(a) (35)(a)
---- ----
Consolidated................................... $106 $123
==== ====
</TABLE>
(a) Reconciling items for the three months ended March 31, 2000 and 1999
includes goodwill and intangible asset amortization and other asset amortization
of $25 million and $21 million, respectively, integration costs of $2 million
and $7 million, respectively, and corporate research and development, corporate
environmental and other corporate items not specifically allocated to business
segments.
15. PENDING TRANSACTIONS
In February, 2000, we announced plans to form a new business venture
with Lehman Brothers Merchant Banking Partners II L.P. The new business will
include our food gums division, along with the Kelco biogums unit, which will be
purchased from Monsanto by the new venture. The Lehman Brothers partnership will
own 72% of the new entity, and we will own the remaining 28%. We expect that the
new venture will have annual revenues of approximately $450 million.
Further, we have entered into discussions with a third party to
monetize our resins business and we are beginning to explore alternatives
regarding our FiberVisions business.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
Within the following discussion, unless otherwise stated, "quarter" and
"three-month period" refer to the first quarter of 2000 and the three months
ended March 31, 2000. All comparisons are with the corresponding periods in the
previous year, unless otherwise stated.
The table below reflects Net sales and Profit from operations for the
quarters ended March 31, 2000 and March 31, 1999, excluding integration charges
of $2 million and $9 million, respectively. These charges are primarily for
employee incentive and retention, consulting, legal and other costs associated
with the 1998 acquisition of BetzDearborn Inc. With the exception of $2 million
of such charges reflected in 1999 cost of sales, these charges are reflected in
Other operating expense in both quarters. Additionally, 1999 Net sales and
Profit from operations of the Functional Products segment have been adjusted to
eliminate the results of this segment's Agar businesses, which was sold in
December 1999. The above adjustments are provided to facilitate comparisons.
<TABLE>
<CAPTION>
(Dollars in millions)
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net Sales by Industry Segment:
Process Chemicals and Services $ 413 $ 412
Functional Products .......... 202 202
Chemical Specialties ......... 171 171
Reconciling Items ............ (1) --
----- -----
Total ................. $ 785 $ 785
===== =====
Profit (Loss) from Operations:
Process Chemicals and Services $ 77 $ 80
Functional Products .......... 52 53
Chemical Specialties ......... 16 26
Reconciling Items ............ (37)(a) (28)(b)
----- -----
Total ................. $ 108 $ 131
===== =====
</TABLE>
(a) Includes $25 million of goodwill and intangible asset amortization and
other asset amortization, approximately $9 million of environmental and
other corporate charges, and approximately $3 million of corporate
research and development costs.
(b) Includes $21 million of goodwill and intangible amortization and other
asset amortization, approximately $4 million of environmental and other
corporate charges, and approximately $3 million of corporate research and
development costs.
The discussion that follows speaks to comparisons in the table through
Profit from operations.
Consolidated Net sales were flat for the quarter as volume improvement
across all three segments were offset by the negative impact of the stronger
dollar relative to foreign currencies and slightly lower pricing in the Process
Chemicals and Services and Functional Products segments. Excluding the impact of
the stronger dollar, revenues increased approximately $33 million or 4%.
Consolidated Profit from operations declined $23 million or approximately 18% as
volume improvements were more than offset by higher costs, primarily higher
polypropylene raw material costs in the Chemical Specialties segment, the impact
of the stronger dollar and lower pricing in the Process Chemicals and Services
and Functional Products segments, and higher corporate charges in Reconciling
Items. Excluding the impact of the
13
<PAGE> 14
stronger dollar, consolidated Profit from operations declined approximately $15
million or approximately 11%.
Process Chemicals and Services segment Net sales were essentially flat.
Higher volumes to the paper markets and to the Asia Pacific region were offset
by the effect of a stronger dollar and price erosion in the pulp and paper
markets in Europe. We had previously announced price increases broadly across
the segment to take effect during the second quarter of this year. Excluding the
effects of rates of exchange, revenues are up approximately $13 million or 3%.
Profit from operations declined $3 million, or approximately 4% as the volume
improvements were more than offset by price declines, higher operating costs and
the impact of the stronger dollar. Excluding currency effects, Profit from
operations was flat.
Functional Products segment Net sales were flat. Volume improvements in
the domestic and European paint and construction markets, as well as pectin
volume improvements in these two regions, were offset by the effects of a
stronger U.S. dollar and lower pricing due to competitive pricing pressure. We
have previously announced price increases broadly across the segment to take
effect during the second quarter. Excluding currency effects, revenues rose
approximately $12 million or 6%. Profit from operations was essentially flat as
the volume improvements were offset by pricing declines and the relative
strength of the dollar versus foreign currencies. Excluding the impact of the
stronger dollar, Profit from operations increased approximately $3 million or
5%.
Chemical Specialties segment Net sales were flat also as volume
improvement in the resins and fibers markets, particularly in Asia, were offset
by the stronger dollar relative to foreign currencies. Excluding currency
effects revenues were up approximately $8 million or 5%. Profit from operations
is $10 million or 38% lower primarily as a result of significantly higher
polypropylene resin costs and the relatively higher costs associated with
meeting European demand in the hygenics market with domestically sourced
production. These factors were partly offset by volume improvements. We
anticipate passing along to our customers a portion of the raw material price
increase over the remainder of the year and will be bringing additional capacity
on line in Europe during the fourth quarter to meet the demands of the hygenics
market there. Excluding currency effects, Profit from operations declined
approximately $9 million or 35%.
Interest and debt expense decreased $10 million for the quarter
primarily as a result of lower overall financial leverage and lower borrowing
costs.
Other income, net (see Note 7) increased $2 million primarily due to
foreign exchange and translation gains.
The effective tax rate of 35.7% for the quarter reflects the benefit of
a favorable resolution of prior years' assessments. The anticipated rate for
2000 is 36% and reflects the implementation of tax planning initiatives begun
last year. The effective tax rate of 38.7% and 31% for the first quarter of 1999
and full year 1999, respectively, also reflects the benefit of adjustments
related to prior years' assessments, as well as utilization of capital losses in
the second, third, and fourth quarters. Additionally, all periods were
negatively impacted by the effects of nondeductible goodwill and intangible
asset amortization.
FINANCIAL CONDITION
Liquidity and financial resources: Net cash used in operations was $12
million for the quarter compared to cash provided by operations of $13 million
in 1999. The decrease primarily reflects the payment of legal settlements, net
of insurance recoveries, higher cash outlays for termination benefits and other
exit costs (see Note 8), and higher cash tax payments, partly offset by lower
interest payments. Current and quick ratios have increased to 1.0 and .7,
respectively, at March 31, 2000, compared with .9
14
<PAGE> 15
and .6, respectively at December 31, 1999. As of March 31, 2000, we have $364
million available under our revolving credit agreement and $308 million of
short-term lines of credit. Additionally, we have $1,763 million available under
our shelf registration, which allows us to issue equity, equity-like, and debt
securities.
Capital Structure and Commitments: Total capitalization (stockholders'
equity, company obligated preferred securities of subsidiary trusts, and debt)
increased to $4.4 billion at March 31, 2000, from $4.3 billion at year-end 1999.
The ratio of debt-to-total capitalization increased to 58% at March 31, 2000
from 57% at December 31, 1999.
The increase in capital expenditures during the quarter primarily
reflects expenditures related to pectin capacity increases in Germany and Brazil
and a methylcellulose capacity increase in Belgium in the Functional Products
segment. The higher Other investing activities is primarily the result of
capitalization of cost related to internally developed software.
RISK FACTORS
Market Risk - Fluctuations in interest and foreign currency exchange
rates affect our financial position and results of operations. We use several
strategies to actively hedge interest rate and foreign currency exposure and
minimize the effect of such fluctuations on reported earnings and cash flow.
Sensitivity of our financial instruments to selected changes in market rates and
prices, which are reasonably possible over a one-year period, are described
below. Market values are the present value of projected future cash flows based
on the market rates and prices chosen. The market values for interest rate risk
are calculated by utilizing a third-party software model that utilizes standard
pricing models to determine the present value of the instruments based on the
market conditions as of the valuation date.
Our derivative and other financial instruments subject to interest rate
risk consist of debt instruments, interest rate swaps, and currency swaps. At
March 31, 2000, net market value of these combined instruments was a liability
of $3.37 billion. The sensitivity analysis assumes an instantaneous 100-basis
point move in interest rates from their levels, with all other variables held
constant. A 100-basis point increase in interest rates at March 31, 2000 would
result in an $68 million decrease in the net market value of the liability. A
100-basis point decrease in interest rates at March 31, 2000 would result in a
$79 million increase in the net market value of the liability. The change in the
sensitivity level from year-end 1999 is primarily due to the fixed distribution
rates associated with the Trust Originated Preferred Securities and the
preferred security component of the CRESTS units (see Note 10), as well as a
reduction in the notional amount of the interest rate swaps related to our
euro-denominated debt obligations in anticipation of the refinancing of such
obligations.
Our financial instruments, subject to changes in equity price risk
including the warrants component of the CRESTS Units issued in 1999 (see Note
10), represent a net obligation of $21 million. The sensitivity analysis assumes
an instantaneous 10% change in valuation with all other variables held constant.
A 10% increase in market values at March 31, 2000 would increase the net
obligation by $10 million, while a 10% decrease would reduce the net obligation
by $9 million. The change in equity price risk from year-end 1999 is primarily
from the impact of the reduction in our stock price on the warrants component of
the CRESTS units.
Our financial instruments, subject to foreign currency exchange risk,
consist of foreign currency forwards, options, and foreign currency debt and
represent a net liability position of $860 million at March 31, 2000. The
following sensitivity analysis assumes an instantaneous 10% change in foreign
currency exchange rates from year-end levels, with all other variables held
constant. A 10% strengthening of the U.S. dollar versus other currencies at
March 31, 2000 would result in a $1 million decrease in the net liability
position, while a 10% weakening of the dollar versus all currencies would result
in a $1 million increase in the net liability position. The change in the
sensitivity level from year-end 1999 is primarily due to the hedging of our
euro-denominated debt obligations with a series of foreign exchange forward
contracts in anticipation of the refinancing of such obligations.
Foreign exchange forward and option contracts are generally used to
hedge firm and anticipated foreign currency cash flows. Thus, there is either an
asset or cash flow exposure related to all the financial
15
<PAGE> 16
instruments in the above sensitivity analysis for which the impact of a movement
in exchange rates would be in the opposite direction and substantially equal to
the impact on the instruments in the analysis. There are presently no
significant restrictions on the remittance of funds generated by our operations
outside the United States.
Environmental - Hercules has been identified by U.S. federal and state
authorities as a "potentially responsible party" for environmental cleanup at
numerous sites. The estimated range of reasonably possible costs for remediation
is between $59 million and $228 million. We do not anticipate that our 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 (see Note 13).
Environmental remediation expenses are funded from internal sources of
cash. Such expenses are not expected to have a significant effect on the
company's ongoing liquidity. Environmental cleanup costs, including capital
expenditures for ongoing operations, are a normal, recurring part of operations
and are not significant in relation to total operating costs or cash flows.
Litigation - Hercules is a defendant in numerous lawsuits that arise
out of, and are incidental to, the conduct of its business. These suits concern
issues such as product liability, contract disputes, labor-related matters,
patent infringement, environmental proceedings, property damage, and personal
injury matters. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these matters could have a material
effect upon the financial position of Hercules, and 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 (see Note 13).
PENDING TRANSACTIONS
As we announced in the fourth quarter of 1999, we have initiated steps
to exit the nitrocellulose business, part of the Functional Products segment. As
a result of this decision, we anticipate incurring site restoration costs,
charges for employee termination benefits, and other charges in 2000.
On February 22, 2000, we announced a new corporate strategy focused on
cash generation, debt reduction and growth of the core businesses: Pulp and
Paper, BetzDearborn, and Aqualon. As part of this strategy, we will monetize our
investment in our Food Gums business through the formation of a joint venture
with Lehman Brothers Merchant Banking Partners II L.P. This new venture will
subsequently acquire the Kelco biogums business from Monsanto. The Lehman
Brothers partnership will own approximately 72% of the new entity and we will
own approximately 28%. We expect that the new entity will have annual revenues
of approximately $450 million (see Note 15).
Further, we have entered into discussions with a third party to
monetize our resins business and we are beginning to explore alternatives
regarding our FiberVisions business (see Note 15).
In addition to monetizing assets, we will be concentrating on improving
our asset utilization, working capital management and reducing corporate
overhead costs. We expect to generate in excess of $1 billion of cash through
all of these actions. The above actions may result in exit costs and other
charges in 2000 as plans are finalized.
YEAR 2000 COMPLIANCE
We recognized the need to ensure that our operations and relationships
with our business partners would not be adversely affected by the Year 2000
problem, and thus developed and implemented a comprehensive project that
addressed those areas of potential vulnerability. We created a cross-functional
16
<PAGE> 17
Year 2000 Program Office at the corporate level to coordinate and provide
policies, guidance, and support for our Year 2000 initiatives. Site compliance
teams were also formed at all major sites worldwide.
We did not experience any difficulties related to the Year 2000 problem
on December 31, 1999 and have not experienced any such difficulties of which we
are aware since that date. Our operations have not, to date, been adversely
affected by any difficulties experienced by any of our suppliers or customers in
connection with the Year 2000 problem. We will continue to monitor our systems
for potential difficulties through the remainder of calendar year 2000.
Forward-looking Statement
This quarterly report on Form 10-Q includes forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, reflecting
management's current analysis and expectations, based on reasonable assumptions.
Results could differ materially depending on such factors as Hercules' inability
to generate cash and reduce debt, business climate, economic and competitive
uncertainties, Hercules' inability to monetize certain of its identified
businesses, higher manufacturing costs, reduced level of customer orders,
ability to integrate BetzDearborn, changes in strategies, risks in developing
new products and technologies, environmental and safety regulations and clean-up
costs, foreign exchange rates, adverse legal and regulatory developments, and
adverse changes in economic and political climates around the world.
Accordingly, there can be no assurance that Hercules will meet analysts'
earnings estimates. As appropriate, additional factors are contained in reports
filed with the Securities and Exchange Commission. This paragraph is included to
provide safe harbor for forward-looking statements, which are not required to be
publicly revised as circumstances change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For discussion of quantitative and qualitative disclosure about market risk, see
the caption "Risk Factors" under Item 2, Management's Discussion and Analysis of
Results of Operations and Financial Condition.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information related to Legal Proceedings, see notes to financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Below is a summary of the final voting results from the April 27, 2000
annual meeting of our shareholders. A quorum of 97,586,379 or 91.22% of the
outstanding voting shares were present in person or by proxy at the annual
meeting.
1. Election of Directors
Four of our 13 directors had terms that expired during 2000 and stood
for reelection this year. The four directors received a majority of the
votes necessary for reelection and are listed below:
<TABLE>
<CAPTION>
Name For Withhold Authority
---- --- ------------------
<S> <C> <C>
Richard M. Fairbanks, III 94,315,040 3,271,339
Alan R. Hirsig 94,308,231 3,278,148
Edith E. Holiday 93,644,270 3,942,109
H. Eugene McBrayer 94,272,984 3,313,395
</TABLE>
Directors continuing in office after the meeting are: Vincent J. Corbo
(Chairman of the Board), John G. Drosdick, Robert G. Jahn, Gaynor N.
Kelley, Ralph L. MacDonald, Jr., George MacKenzie, Peter McCausland,
John A. H. Shober, and Paula A. Sneed. Mr. MacKenzie was elected to the
Board on April 5, 2000, to fill the unexpired director's term of R.
Keith Elliott, who retired as Chairman on April 1, 2000.
2. Ratification of PricewaterhouseCoopers LLP as Independent
Accountants, which proposal received a majority of the votes necessary
for ratification.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Please see the exhibits listed on the Exhibit Index.
(b) Reports on Form 8-K.
Hercules did not file any Current Reports on Form 8-K during
the quarter ended March 31, 2000.
18
<PAGE> 19
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: /s/ George MacKenzie
-------------------------------
George MacKenzie
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer and
duly authorized signatory)
May 12, 2000
By: /s/ Michael J. Scott
-------------------------------
Michael J. Scott
Vice President and Controller
(Principal Accounting Officer)
May 12, 2000
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description Incorporated by Reference to
- ------ ----------- ----------------------------
<S> <C> <C>
3-A.1 Restated Certificate of Incorporation of Hercules Exhibit 3-A to Hercules' Annual
Incorporated as revised and amended July 6, 1988 Report on Form 10-K for the
year ended December 31, 1992.
3-A.2 Certificate of Amendment dated October 24, 1995 to the Exhibit 4.1 a to Hercules'
Restated Certificate of Incorporation of Hercules Registration Statement on Form
Incorporated as revised and amended July 5, 1998 S-3, filed September 15, 1998
(File No. 333-63423).
3-B By-Laws of Hercules Incorporated as revised and amended Exhibit 3-B to Hercules' Annual
October 30, 1991 Report on Form 10-K for the
year ended December 31, 1992.
4-A Amendment No. 3 dated as of January 24, 2000, to the Exhibit 4-AD to Hercules' Annual
Amended and Restated Trust Agreement of Hercules Report on Form 10-K for the year
Trust V, as amended December 31, 1999.
4-B Fifth Supplemental Indenture, dated as of January 24, Exhibit 4-AE to Hercules' Annual
2000, to the Junior Subordinated Debentures Indenture, on Form 10-K for the year
as supplemented, between Hercules and Chase Manhattan ended December 31, 1999.
Bank, dated November 12, 1998
4-C Amendment No. 4 dated as of February 9, 2000, to the Exhibit 4-AF to Hercules' Annual
Amended and Restated Trust Agreement of Hercules Report on Form 10-K for the year
Trust V, as amended ended December 31, 1999.
4-D Sixth Supplemental Indenture, dated as of February 9, Exhibit 4-AG to Hercules' Annual
2000, to the Junior Subordinated Debentures Indenture, Report on Form 10-K for the year
as supplemented, between Hercules and Chase Manhattan ended December 31, 1999.
Bank, dated November 12, 1998
4-E Remarketing and Contingent Purchase Agreement, dated Exhibit 4-AH to Hercules' Annual
as of February 9, 2000, between Hercules and Banc of Report on Form 10-K for the year
America Securities LLC ended December 31, 1999.
4-F Form of RHINOS Preferred Securities Included as Exhibit A-1 to
Exhibit 4-C to this Form 10-Q.
4-G Form of Auction Rate Reset Junior Subordinated Note Included as Exhibit A to
Series A Exhibit 4-B to this Form 10-Q.
27 Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HERCULES
INCORPORATED'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 85,000
<SECURITIES> 0
<RECEIVABLES> 731,000
<ALLOWANCES> 15,000
<INVENTORY> 389,000
<CURRENT-ASSETS> 1,330,000
<PP&E> 2,970,000
<DEPRECIATION> 1,666,000
<TOTAL-ASSETS> 5,851,000
<CURRENT-LIABILITIES> 1,392,000
<BONDS> 1,898,000
992,000
0
<COMMON> 83,000
<OTHER-SE> 867,000
<TOTAL-LIABILITY-AND-EQUITY> 5,851,000
<SALES> 785,000
<TOTAL-REVENUES> 785,000
<CGS> 437,000
<TOTAL-COSTS> 679,000
<OTHER-EXPENSES> 23,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,000
<INCOME-PRETAX> 56,000
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 36,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,000
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
</TABLE>
