-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OCCpjgC8C2eD4r1KlDSt43EpPzMAboKvMEtH8F0ShJ6UPivtDpTW6rC/V3CtN+1k lHKWsAUeDvjgC/HZvosSeQ== 0000893220-98-001381.txt : 19980817 0000893220-98-001381.hdr.sgml : 19980817 ACCESSION NUMBER: 0000893220-98-001381 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES INC CENTRAL INDEX KEY: 0000046989 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 510023450 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00496 FILM NUMBER: 98691673 BUSINESS ADDRESS: STREET 1: 1313 N MARKET ST STREET 2: HERCULES PLZ CITY: WILMINGTON STATE: DE ZIP: 19894 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: HERCULES PLAZA STREET 2: RM 8151 NW CITY: WILMINGTON STATE: DE ZIP: 19894-0001 FORMER COMPANY: FORMER CONFORMED NAME: HERCULES POWDER CO DATE OF NAME CHANGE: 19680321 10-Q 1 HERCULES INCORPORATED, FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission file number 1-496 HERCULES INCORPORATED A Delaware Corporation I.R.S. Employer Identification No. 51-0023450 Hercules Plaza 1313 North Market Street Wilmington, Delaware 19894-0001 Telephone: 302-594-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ As of July 30, 1998, 94,567,009 shares of registrant's common stock were outstanding. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. HERCULES INCORPORATED CONSOLIDATED STATEMENT OF INCOME (Dollars in millions, except per share)
(Unaudited) Three Months Ended June 30, Six Months Ended June 30, 1998 1997 1998 1997 ----- ----- ----- ----- Net sales ................................... $ 445 $ 502 $ 875 $ 997 Cost of sales ............................... 267 314 529 634 Selling, general, and administrative expenses 68 68 129 134 Research and development .................... 12 14 25 28 Other operating expenses (income), net ...... (3) (1) (3) 162 ----- ----- ----- ----- Profit from operations ...................... 101 107 195 39 Equity in income of affiliated companies .... 5 4 10 20 Interest and debt expense ................... 13 9 24 19 Other income (expense), net ................. 16 13 (28) 348 ----- ----- ----- ----- Income before income taxes .................. 109 115 153 388 Provision for income taxes .................. 35 40 51 205 ----- ----- ----- ----- Net income .................................. $ 74 $ 75 $ 102 $ 183 ===== ===== ===== ===== Earnings per share: Basic .............................. $0.78 $0.75 $1.07 $1.82 ===== ===== ===== ===== Diluted ............................ $0.77 $0.73 $1.06 $1.76 ===== ===== ===== ===== Dividends per share ......................... $0.27 $0.25 $0.54 $ .50 ===== ===== ===== =====
See accompanying notes to financial statements. 2 3 HERCULES INCORPORATED CONSOLIDATED BALANCE SHEET (Dollars in millions)
(Unaudited) June 30, December 31, 1998 1997 ------- ------- ASSETS Current assets Cash and cash equivalents ........................... $ 32 $ 17 Accounts and notes receivable, net .................. 420 389 Inventories Finished products ............................... 139 121 Materials, supplies, and work in process ........ 128 113 Deferred income taxes ............................... 49 49 ------- ------- Total current assets ............................ 768 689 Property, plant, and equipment ......................... 2,160 2,088 Accumulated depreciation and amortization .............. 1,435 1,401 ------- ------- Net property, plant, and equipment .............. 725 687 Investments ............................................ 602 615 Other assets ........................................... 555 420 ------- ------- Total assets .................................... $ 2,650 $ 2,411 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable .................................... $ 128 $ 116 Accrued expenses .................................... 352 317 Short-term debt ..................................... 474 275 Income taxes payable ................................ 80 91 ------- ------- Total current liabilities ....................... 1,034 799 Long-term debt ......................................... 461 419 Deferred income taxes .................................. 169 160 Postretirement benefits and other liabilities .......... 338 343 Stockholders' equity Common stock (shares issued: 1998 -- 154,632,613; 1997 -- 154,357,015) ............................ 81 80 Additional paid-in capital .......................... 508 504 Foreign currency translation adjustment ............. (10) (2) Retained earnings ................................... 2,214 2,163 ------- ------- 2,793 2,745 Reacquired stock, at cost (shares: 1998 -- 60,065,557; 1997 -- 58,289,376) ................................. 2,145 2,055 ------- ------- Total stockholders' equity ...................... 648 690 ------- ------- Total liabilities and stockholders' equity ...... $ 2,650 $ 2,411 ======= =======
See accompanying notes to financial statements. 3 4 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOW (Dollars in millions)
(Unaudited) Six Months Ended June 30, 1998 1997 ----- ----- Net cash provided by operations ............................ $ 38 $ 63 ----- ----- CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures ....................................... (58) (49) Proceeds of investment and fixed asset disposals ........... 54 139 Businesses acquired, net of cash received .................. (95) -- Other, net ................................................. (16) (3) ----- ----- Net cash provided by (used in) investing activities . (115) 87 ----- ----- CASH FLOW FROM FINANCING ACTIVITIES: Long-term debt proceeds .................................... 72 114 Long-term debt repayments .................................. (27) (90) Change in short-term debt .................................. 198 (2) Common stock reissued ...................................... 8 6 Common stock reacquired .................................... (105) (136) Dividends paid ............................................. (52) (50) ----- ----- Net cash provided by (used in) financing activities . 94 (158) ----- ----- Effect of exchange rate changes on cash .................... (2) (1) ----- ----- Net decrease in cash and cash equivalents .................. 15 $ (9) Cash and cash equivalents - beginning of period ............ 17 30 ----- ----- Cash and cash equivalents - end of period .................. $ 32 $ 21 ===== ===== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) .................... $ 22 $ 13 Income taxes ............................................ 74 76 Noncash investing and financing activities: Accounts payable for common stock acquisitions .......... 4 3 Incentive plan stock issuances .......................... 4 3 Investment in long-term note ............................ -- 500 Conversion of notes and debentures ...................... 4 1
See accompanying notes to financial statements. 4 5 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Dollars in millions)
(Unaudited) Three Months Ended June 30, Six Months Ended June 30, 1998 1997 1998 1997 ----- ----- ----- ----- Net income ............................. $ 74 $ 75 $ 102 $ 183 Foreign currency translation, net of tax (1) (7) (8) (41) ----- ----- ----- ----- Comprehensive income ................... $ 73 $ 68 $ 94 $ 142 ===== ===== ===== =====
See accompanying notes to financial statements. 5 6 NOTES TO FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) 1. These condensed financial statements are unaudited, but in the opinion of management include all adjustments necessary to present fairly the Company's financial position and results of operations for interim periods. It is suggested that these condensed financial statements be read in conjunction with the accounting policies and the financial statements and notes thereto included in the Company's annual report for 1997. 2. Earnings per share (EPS) are calculated under the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," adopted in the fourth quarter of 1997. EPS amounts for 1997 have been restated to conform with SFAS No. 128. The following table shows the amounts used in computing EPS and the effect on income and the weighted-average number of shares of dilutive potential common stock:
Three Months Ended June 30, Six Months Ended June 30, 1998 1997 1998 1997 ------- ------- ------- ------- Basic Net income ........................ $ 74 $ 75 $ 102 $ 183 Weighted-average shares outstanding 94.8 99.8 95.3 100.5 ------- ------- ------- ------- EPS ............................... $ 0.78 $ 0.75 $ 1.07 $ 1.82 ======= ======= ======= ======= Diluted Net Income ........................ $ 74 $ 75 $ 102 $ 183 Interest on convertible debentures -- 1 -- 1 ------- ------- ------- ------- Net income for EPS calculation .... $ 74 $ 76 $ 102 $ 184 ======= ======= ======= ======= Weighted-average shares outstanding 94.8 99.8 95.3 100.5 Options ........................... .7 1.2 .7 1.2 Debentures ........................ .6 2.9 .7 3.0 ------- ------- ------- ------- Adjusted weighted-average shares .. 96.1 103.9 96.7 104.7 ------- ------- ------- ------- EPS ............................... $ 0.77 $ 0.73 $ 1.06 $ 1.76 ======= ======= ======= =======
3. Cost and expenses include depreciation as follows:
June 30, 1998 1997 ------- ------- Three months ended...................................... $ 16 $ 19 Six months ended ...................................... 32 41
4. Other operating expenses, net for the six months ended June 30, 1997 include charges of $141 million associated with management organizational changes and adoption of alternative competitive strategies relative to current businesses, announced in late February and March of 1997. This charge includes $118 million related to asset rationalizations and impairment and $23 million related to severance benefits. Included in the $118 million is an impairment loss of $91 million ($23 million in Food & Functional Products and $68 million in Chemical Specialties), where the sum of estimated future cash flows (undiscounted) was less than the carrying amount of the assets. Additionally, the Company recognized approximately $27 million of rationalization charges primarily associated with certain assets, which will no longer be utilized, and lease abandonment costs. Concurrently, management authorized and committed the Company to a plan to reduce its work force and accrued $23 million of severance related benefits, of which approximately $12 million is the remaining liability at June 30, 1998. Additionally, other operating 6 7 expenses include $13 million of net environmental cleanup costs, principally for nonoperating sites and $8 million of executive retirement benefits. Other operating expenses, net for the quarter and six months ended June 30, 1998 primarily reflects a favorable settlement of an environmental insurance claim. 5. Interest and debt costs are summarized as follows:
(Dollars in millions) June 30, ------------------------ 1998 1997 ------ ------ Three Months Ended: Costs incurred ...................... $ 15 $ 11 Amount capitalized .................. 2 2 ------ ------ Interest expense .................... $ 13 $ 9 ====== ====== Six Months Ended: Costs incurred ...................... $ 29 $ 22 Amount capitalized .................. 5 3 ------ ------ Interest expense .................... $ 24 $ 19 ====== ======
6. Other income (expense), net for the quarter and six months ended June 30, 1998 includes legal settlements and accruals, primarily related to the settlement of a Qui Tam (Whistle Blower) lawsuit (see Note 9) of $1 million and $64 million, respectively, interest income of $10 million and $19 million, respectively, primarily related to the $500 million note obtained upon completion of transactions that monetized the Tastemaker investment (see below) and gains on sale of investments of $6 million and $17 million. Additionally, the six months reflects a $2 million write off of a claim related to a divested business. Other income, net for the quarter and six months ended June 30, 1997 includes net foreign currency gains of $3 million and $14 million, respectively, and interest income, primarily related to the $500 million note of $9 million and $10 million, respectively. Additionally, the six months reflect a gain of $357 million on completion of transactions to monetize the investment in Tastemaker, a 50% owned flavors joint venture, and charges of $32 million related to legal settlements and accruals. 7 8 7. A summary of short-term and long-term debt follows:
(Dollars in millions) June 30, December 31, 1998 1997 -------- ------------ SHORT-TERM: Commercial paper ......................... $ 350 $ 195 Banks .................................... 124 80 Current maturities ....................... -- -- ------ ------ $ 474 $ 275 ====== ======
At June 30, 1998, Hercules had $174 million of unused lines of credit that may be drawn as needed. Lines of credit in use or supporting commercial paper at June 30, 1998, were $103 million.
(Dollars in millions) 1998 1997 ------ ------ LONG-TERM: 6.15% notes due 2000 .............................. $ 100 $ 100 6.60% notes due 2027 .............................. 100 100 7.85% notes due 2000 .............................. 25 25 6.625% notes due 2003 ............................. 125 125 8% convertible subordinated debentures due 2010 ... 6 10 Commercial paper .................................. 50 50 Variable rate loans ............................... 46 2 Other ............................................. 9 7 ------ ------ 461 419 Current maturities of long-term debt .............. -- -- ------ ------ Net long-term debt ................................ $ 461 $ 419 ====== ======
8. In April 1998, Hercules completed the acquisition of the worldwide paper chemicals group of Houghton International, Inc. and the international pectin business of Citrus Colloids Ltd. for aproximately $95 million. Houghton's paper chemicals group has annual sales of approximately $30 million and Citrus Colloids has annual revenues in excess of $30 million. In July 1998, Hercules and BetzDearborn Inc. signed a definitive merger agreement under which Hercules will acquire all BetzDearborn outstanding shares for approximately $2.4 billion in cash and, in addition, assume $700 million in debt. The transaction, subject to approvals by BetzDearborn shareholders and regulatory authorities is expected to close during the fourth quarter of 1998. Additionally, in July 1998, Hercules completed the acquistion of the 49% share of FiberVisions owned by its joint venture partner Jacob Holm & Sons A/S for approximately $230 million in cash, plus assumed debt. FiberVisions has annual revenues of approximately $250 million. The transaction closed in the third quarter of 1998. 9. Since 1991, the Board of Directors has authorized the repurchase of up to 74,650,000 shares of Company common stock, 6,150,000 shares of which is intended to satisfy requirements of various employee benefit programs. Through June 30, 1998, a total of 66,247,388 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 $37.36 per share. 8 9 10. 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 is effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in an asset's, liability's, or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. The Company has not yet determined the impact that the adoption of SFAS 133 will have on its earnings or statement of financial position. 11. COMMITMENTS AND CONTINGENCIES 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 $64 million and $210 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. In April 1998, the trial of the Jacksonville, Arkansas, site was completed. The jury has returned a "Special Verdict Form" with findings that will be used by the Court to enter a judgment. The judgment will determine the amount of Hercules recovery for past clean-up expenditures and will state 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 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. 9 10 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). 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. 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 United States will begin in October 1998. Hercules expects to appeal the Court's determination with respect to its liability, the divisibility of harm issue, and Standard Chlorine's liability when final judgment is entered. Hercules' potential costs for remediation of the Jacksonville site are presently estimated between $18 million and $92 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 June 30, 1998, 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. 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. 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 has been a defendant in two Qui Tam (Whistle Blower) lawsuits in the U.S. District Court for the Central District of Utah, brought by former employees of the Aerospace business sold to Alliant Techsystems. The first suit (United States of America ex. rel. Katherine A. Colunga v. Hercules Incorporated, et al., Civil No. 89-C-954B), involved allegations relating to submission of false claims and records under various government contracts, delivery of defective products, a deficient quality control program, and wrongful termination claims. The second suit (United States of America ex. rel. Benny D. Hullinger, et al., Civil No. 92-CV-085) involves allegations relating to submission of false claims and records, 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. (A third Qui Tam lawsuit is described in the third paragraph below.) The first lawsuit was previously scheduled for trial in June 1998. 10 11 The Court denied various motions filed by Hercules, including motions for summary judgment and other motions designed to limit the scope of the trial and the extent of damages claimed. If any damages had been awarded by the jury under the False Claims Act, such damages would have been automatically tripled by the Court, and attorneys' fees and costs would also have been added. As a result of the Court's denial of the Company's motions, and the Court's position as to how the relevant contracts should be interpreted, which position was adverse to the Company, damage claims could have been presented to the jury in amounts which, if awarded, would have had a material adverse effect on the Company. The damages in the second suit were not defined. In May 1998, Hercules announced that it had agreed to settle the first lawsuit. Under the terms of the settlement, which was subject to the approval of the Court, Hercules was obligated to pay $36 million to settle the case, plus another $19 million to cover the plaintiff's attorneys fees, expenses, and costs. The Company believed no damages were incurred by the government, no false claims were made to the government, and alleged damages were speculative and unsupportable. However, because of the mounting legal costs, the prospect of treble damages, uncertainty present in any litigation, and to avoid the major costs of a lengthy trial and subsequent appeal by the losing party management determined that the settlement was in the best interest of Hercules' shareholders. The settlement was approved by the Court, and the case was dismissed in July 1998. In August 1998, the parties to the second lawsuit reached a tentative settlement, subject to approval of the Court. The settlement was recognized in the first quarter of 1998. 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. In March 1997, Alliant and Hercules received a partially unsealed complaint that named both as defendants, initiated on an unknown date, and filed in an undisclosed federal court, in a Qui Tam action by a former employee alleging violations of the False Claims Act. The action has subsequently been identified as United States of America ex.rel. P. Robert Pratt v. Alliant Techsystems, Inc. and Hercules Incorporated, Civil No. 95-4812 SVW(JGx) pending in the U.S. District Court for the Central District of California. The action alleges labor mischarging at Alliant's Bacchus Works facility in Magna, Utah, and contains a claim for wrongful termination. 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. In February 1998, the parties reached a tentative settlement, which has now been finalized, under which all claims alleging mischarging to the Intermediate Nuclear Forces Contract have been settled. The settlement was recognized in the fourth quarter of 1997. Other portions of the complaint, which include allegations of mischarging to other government contracts and claims for wrongful termination of employment, remain unresolved. The government has indicated it does not intend to intervene in these matters. While it is not feasible to predict the outcome of all pending suits and claims, other then the settlement described above, 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. 11 12 OTHER FINANCIAL INFORMATION Operational Highlights
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30, 1998 1997 1998 1997 ----- ----- ----- ----- NET SALES BY INDUSTRY SEGMENT Chemical Specialties ....................... $ 227 $ 267 $ 441 $ 539 Food & Functional Products ................. 218 235 433 458 Corporate and Other ........................ -- -- 1 -- ----- ----- ----- ----- Total ................................ $ 445 $ 502 $ 875 $ 997 ===== ===== ===== ===== PROFIT (LOSS) FROM OPERATIONS BY INDUSTRY SEGMENT Chemical Specialties ....................... $ 43 $ 49 $ 81 $ 3 Food & Functional Products ................. 58 60 113 57 Corporate and Other ........................ -- (2) 1 (21) ----- ----- ----- ----- Total ................................ $ 101 $ 107 $ 195 $ 39 ===== ===== ===== =====
12 13 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. The table below reflects results through profit from operations on an adjusted basis. The 1997 results exclude the effects of asset rationalization and impairment, severance, benefits, and other adjustments aggregating $161 million (see Notes 4 and 6). Additionally, 1997 has been further adjusted to exclude the operations of the Fibers Division of the Chemical Specialties segment, which was joint ventured in June 1997. The table should make it easier to compare year-over-year operating results. Accordingly, the discussion that follows speaks to the comparisons in the table through profit from operations.
(Dollars in millions) Three Months Ended June 30, Six Months Ended June 30, 1998 1997 1998 1997 ----- ----- ----- ----- Net sales ....................................... $ 445 $ 462 $ 875 $ 913 Cost of sales ................................... 267 282 529 566 Selling, general, and administrative expenses ... 68 64 129 126 Research and development ........................ 12 13 25 27 Other operating expenses (income), net .......... (3) 1 (3) 2 ----- ----- ----- ----- Profit from operations .......................... $ 101 $ 102 $ 195 $ 192 ===== ===== ===== ===== Net Sales by Industry Segment Chemical Specialties ....................... $ 227 $ 227 $ 441 $ 455 Food & Functional Products ................. 218 235 433 458 Corporate and other ........................ -- -- 1 -- ----- ----- ----- ----- Total ................................. $ 445 $ 462 $ 875 $ 913 ===== ===== ===== ===== Profit (Loss) From Operations by Industry Segment Chemical Specialties ....................... $ 43 $ 44 $ 81 $ 92 Food & Functional Products ................. 58 60 113 105 Corporate and other ........................ -- (2) 1 (5) ----- ----- ----- ----- Total ................................. $ 101 $ 102 $ 195 $ 192 ===== ===== ===== =====
13 14 RESULTS OF OPERATIONS Within the following discussion, unless otherwise stated, "quarter" and "six-month period" refer to the second quarter of 1998 and the six months ended June 30, 1998. All comparisons are with the corresponding periods in the previous year unless otherwise stated. Consolidated net sales decreased $17 million and $38 million for the quarter and six-month period, or 4% respectively. Chemical Specialties sales were flat for the quarter and declined 3%, or $14 million, for the six-month period. Food & Functional Products sales decreased 7%, or $17 million, for the quarter, and 5%, or $25 million, for the six-month period. The primary reason for the decline in sales revenues is the economic crisis in Asia. This has not only negatively affected sales volumes and prices in Asia, but has also resulted in increased competitive pressure and lower prices in other parts of the world. The overall effects of Asian economic crisis for the quarter and six-month period are estimated to be approximately $27 million and $44 million on a consolidated basis; $14 million and $22 million in each segment. Additionally, weaker foreign currencies relative to the dollar negatively impacted consolidated and segment sales by 2% for the quarter and 3% for the six-month period, or $10 million and $26 million on a consolidated basis; $5 million and $13 million in each segment. Improved volume (excluding Asia) and favorable sales mix in both segments, particularly in Chemical Specialties, coupled with improved pricing in Food & Functional Products, partially offset the decreases noted above as well as lower prices in Chemical Specialties. Consolidated profit from operations was virtually flat for the quarter and six-month period. Manufacturing cost improvement initiatives, improved plant operations and lower raw material costs, in Chemical Specialties (excluding Asia), offset the reduced sales revenues. As a result, overall gross margin improved to 40% for the quarter and six-month period from 39% and 38%, respectively, for the comparable year ago periods. For the six-month period, Chemical Specialties' operating profit declined $11 million, or 12%, as volume improvements (excluding Asia) and manufacturing cost initiatives partially offset the negative impact of Asia and weaker foreign currencies. In Food & Functional Products, operating profit increased $8 million, or 8%, as improved pricing and manufacturing cost initiatives more than offset the declines associated with lower demand from the Asian crisis and the effect of weaker foreign currencies relative to the dollar. Equity in income of affiliated companies decreased $10 million for the six-month period and primarily reflects the monetization of investments in Tastemaker in March 1997 (see Note 6) and Alliant Techsystems in December 1997, partially offset by equity income from FiberVisions, the 51% owned fibers joint venture. Interest and debt expense increased for the quarter and six-month period, principally due to higher average debt outstanding. Other income, net increased $3 million for the quarter and decreased $376 million for the six-month period (see Note 6). The provision for income taxes for the six-month period ended June 30, 1998 reflects an estimated annual effective tax rate of 34.5%. The 1997 full-year rate of 45% was unfavorably affected by a higher rate on the monetization of the Tastemaker and Alliant investments, along with 14 15 required increases to tax reserves related to anticipated tax assessments by federal, state, and foreign tax authorities. FINANCIAL CONDITION Cash provided by operations was $38 million compared to $63 million in 1997. Higher working capital requirements and higher interest payments primarily account for the decrease. In April 1998, Hercules completed the acquisition of the worldwide paper chemicals group of Houghton International, Inc. and the international pectin business of Citrus Colloids Ltd. for approximately $95 million. Houghton's paper chemicals group has annual sales of approximately $30 million and Citrus Colloids has annual revenues in excess of $30 million. In July 1998, Hercules and BetzDearborn Inc. signed a definitive merger agreement under which Hercules will acquire all BetzDearborn outstanding shares for approximately $2.4 billion in cash and, in addition, assume $700 million in debt. The transaction, subject to approvals by BetzDearborn shareholders and regulatory authorities is expected to close during the fourth quarter of 1998. Additionally, in July 1998, Hercules completed the acquisition of the 49% share of FiberVisions owned by its joint venture partner Jacob Holm & Sons A/S for approximately $230 million in cash, plus assumed debt. FiberVisions has annual revenues of approximately $250 million. The transaction closed in the third quarter of 1998. Short-term liquidity has remained relatively stable since year-end 1997, with current and quick ratios at .7 and .4, respectively. At June 30, 1998, $174 million was available under short-term lines of credit and $300 million was available under revolving credit. During the six-month period, the Company entered into a financing agreement with a bank, which provides for the sale of promissory notes in the principal amount of up to $22 million at any one time. The agreement, which expires in December 1998, provides for commitments by the bank and the Company under which the bank purchases promissory notes denominated in a number of foreign currencies in exchange for U.S. dollars. The notes are repayable only to the extent of future revenue of certain foreign subsidiaries. Obligations under the agreement are not cancelable by the Company or the bank. Transaction gains and loses related to the notes are deferred and recognized as an adjustment to the revenue supporting the note repayment. Additionally, during the quarter, the Company entered into a $480 million cross currency swap agreement to effectively hedge its investment in foreign subsidiaries. The interest rate effects of the cross currency swap agreement are recorded as an adjustment to interest expense. The company's derivative and other financial instruments subject to interest rate risk consist of debt instruments, interest rate swaps, cross-currency swaps, and the five-year $500 million note received as a result of the Tastemaker transaction. At June 30, 1998, net market value of these combined instruments was a liability of $462 million. The sensitivity analysis assumes an instantaneous 100-basis point move in interest rates from their levels at June 30, 1998, with all other variables held constant. A 100-basis point increase in interest rates would result in a $21 million decrease in the net liability. A 100-basis point decrease in interest rates would result in a $28 million increase in the net liability. The market value of the company's portfolio of financial instruments subject to equity price risk at June 30, 1998, was an asset of $42 million. The sensitivity analysis assumes an instantaneous 10% change in valuation with all other variables held constant. A 10% increase or decrease would increase or decrease the asset position by $4 million. 15 16 The company's financial instruments subject to foreign currency exchange risk consist of foreign currency forwards, options, and cross-currency swaps and represent a net asset position of $1 million at June 30, 1998. The sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from the June 30, 1998 levels, with all other variables held constant. A 10% strengthening of the U.S. dollar versus other currencies would result in an increase of $51 million in the net asset position, while a 10% weakening of the dollar versus all other currencies would result in a decrease of $62 million in the net asset position. 16 17 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. On March 26, 1998 the Court granted its approval for the termination of the Consent Decree. In December 1997, Hercules received notice of an enforcement action by the State of Georgia, Environmental Protection Department (EPD). EPD has requested that Hercules enter into a proposed Consent Order, alleging violations of the Resource Conservation and Recovery Act (RCRA) and seeking a civil penalty of $250,000. Hercules has entered into settlement discussions with EPD in an attempt to resolve this matter. Item 4. Submission of Matters to a Vote of Security-Holders. The Company's Annual Meeting was held on April 30, 1998. Required information has been supplied in registrant's Form 10-Q for the quarter ended March 31, 1998. Item 5. Other Information. In accordance with recent amendments to the shareholder proposal rules set forth in Rules 14a-4 and 14a-8 under the Securities Exchange Act of 1934, as amended, written notice of shareholder proposals submitted outside the processes of Rule 14a-8 for consideration at the 1999 Annual Shareholders' Meeting must be received by the Company on or before February 3, 1999, in order to be considered timely for purposes of Rule 14a-4. The persons designated in the Company's proxy statement shall be granted discretionary authority with respect to any shareholder proposal of which the Company does not receive timely notice. 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 during the quarter; however, optional (Item 5 event) Form 8Ks were filed during the third quarter related to the acquisition of the 49% share of the FiberVisions joint venture and the announcement of the signing of a definitive merger agreement between Hercules and BetzDearborn. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Hercules Incorporated by George MacKenzie -------------------------------- George MacKenzie Senior Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized signatory) August 14, 1998 by Vikram Jog -------------------------------- Vikram Jog Vice President and Controller (Principal Accounting Officer) August 14, 1998 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 HERCULES INCORPORATED 10Q98 1,000 6-MOS DEC-31-1998 JUN-30-1998 32,000 0 420,000 0 267,000 768,000 2,160,000 1,435,000 2,650,000 1,034,000 0 0 0 81,000 567,000 2,650,000 875,000 875,000 529,000 680,000 0 0 24,000 153,000 51,000 102,000 0 0 0 102,000 1.07 1.06
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