Hercules Inc. - Company Profile, Information, Business Description, History, Background Information on Hercules Inc.



Hercules Plaza
1313 N. Market Street
Wilmington, Delaware 19894-0001
U.S.A.

Company Perspectives:

Hercules Incorporated is a global manufacturer of chemical specialty products used in a variety of home, office, and industrial products. Core businesses and their key products are: Aqualon, for water-soluble polymers that thicken latex paints; Paper Technology, for strength and sizing aids used in manufacturing paper; Resins, for hydrocarbon and rosin resins used in adhesives; and Food Gums, for natural gum ingredients in food and beverages. Major equity companies are Alliant Techsystems, a technology leader in aerospace and defense, and a joint venture that combines the Hercules Fiber business with the Danaklon Group. With expert technical and sales service, innovative product development, and the number one or two positions in their major markets, Hercules' businesses generate excellent returns on capital, stable and strong operating margins, and good free cash flow. Hercules' unique technology base centers on the conversion of natural raw materials--pine stumps, wood pulp, cotton linters, citrus peels, and seaweed--into value-added chemical specialties. The corporation's focus is on sustainable, long-term growth in shareholder value, driven by new product growth and continuous improvement in manufacturing costs.

History of Hercules Inc.

Over its lifetime, Hercules Inc. has served as both a model of chemical industry management and a slow-moving corporate behemoth. With its downturns inspiring leadership changes and restructuring, Hercules usually has landed not just on its feet but ahead of the pack.

The Hercules Powder Company was one of the several small explosives companies acquired by the Du Pont Company in the 1880s. By the beginning of the 20th century Du Pont had absorbed so many of its competitors that it was producing two-thirds of the dynamite and gunpowder sold in the United States. In 1912 a federal court, citing the Sherman Anti-Trust Act, ordered Du Pont broken up. It was through this court-ordered action that the Hercules Powder Company was reborn, a manufacturer of explosives ostensibly separate from Du Pont.

The division of the Du Pont Company into Du Pont, Atlas Powder Company, and Hercules Powder Company, was intended to foster competition in the explosives industry, but in reality the antitrust agreement allowed the connection between Hercules and the parent company to remain intact. The new company was staffed by executives who had been transplanted from the Du Pont headquarters across the street into the main offices of Hercules in Wilmington, Delaware. As Fortune magazine remarked in 1935, "The Hercules headquarters is in Wilmington and breathes heavily Dupontizied air." Not only did the Du Pont family retain a substantial financial interest in Hercules, but as late as 1970 the president of Hercules was related to the Du Pont family.

The Hercules Powder Company was set up as a fully developed business entity, complete with several explosives factories, a healthy segment of the explosives market, and a $5 million "loan" in its treasury. It operated successfully and made a profit from its very first year. Given its early advantage it is not surprising that Hercules developed into one of the larger chemical companies in the United States.

Hercules began as an explosives company serving the mining industry, gun owners, and the military. In the first month of operation its facility in Hazardville, New Jersey, exploded. Hercules had plants up and down the East Coast, however, and the loss of the Hazardville plant was not financially disastrous. Like other manufacturers of explosives, Hercules preferred many small plants to a few large ones. Due to the company's risks involved in product transportation, these plants were located in proximity to customers, rather than near the source of raw materials.

The company's first big break came in 1916 when Hercules signed a lucrative contract to supply Britain with acetone, a contract that stipulated, however, that no known sources of acetone be used. Hercules sent ships out to the Pacific to harvest giant kelp, which was used to produce the solvent Britain needed. That same year Hercules paid large dividends on its stock shares. The company also benefited from its sale of gunpowder to the army.

In 1920 Hercules began to manufacture cotton cellulose from the lint left over from cotton seeds once the high-quality cotton has been extracted. Cotton cellulose is a fiber that has hundreds of industrial uses. When treated with nitroglycerine it becomes nitrocellulose, important in the production of lacquers and plastics. Hercules quickly became the world's leading maker of cotton cellulose. This early effort at diversification in no way threatened Du Pont, which also manufactured nitrocellulose, but only for its own uses.

Throughout its history Hercules has been successful at transforming a previously worthless substance into something useful. But for every time Hercules has succeeded in this kind of endeavor, it has also failed. The company's foray into naval stores is an example of this. Naval stores is a term that refers to products derived from tree sap, and recalls the early use of pitch to caulk boats. Gums, turpentine, and various adhesives are all referred to as naval stores. In 1920 a Senate committee predicted that the virgin pine forests from which high-quality naval stores were derived would soon be exhausted and that there would be no naval stores industry left in the U.S. The management at Hercules saw, or thought it saw, a chance to corner the naval stores market.

Hercules joined forces with Yaryan, one of the few companies that distilled rosin from tree stumps rather than pitch. After buying rights to pull stumps and building a new rosin distilling plant, Hercules quickly became the world's largest producer of naval stores. But a problem soon arose: the expected shortage of naval stores never materialized. Hercules, the Senate Committee, and the naval stores industry overlooked the fact that pine trees grow back rather quickly, and that with proper management there would be plenty of pitch. Hercules was stuck with fields full of stumps, facilities to process the stumps, and a large amount of inferior turpentine. Turpentine derived from stumps is dark in color and hence unsuitable for some uses in finishing and painting furniture.

Endowed with sufficient capital (a legacy from Du Pont), Hercules was able to salvage its naval stores division by developing a paler turpentine and convincing its customers that wood (as opposed to pitch) naval stores were a bargain. In 1935 naval stores, the second largest of the company's investments, provided the smallest percentage of company sales. Naval stores and products derived from them eventually became a mainstay of the company, albeit one with slow growth. Not until the mid-1970s did the naval stores division emerge as a profitable endeavor. It was the explosives division which ensured the company's financial stability throughout the Depression.

By 1935 Hercules had five divisions: explosives, naval stores, nitrocellulose, chemical cotton, and paper products. Chemical cotton is made from the short fibers of cotton unsuitable for weaving, which are pressed into sheets and sold to industries as a source of cellulose. The paper products division began in 1931 with the purchase of Paper Makers Chemical Corporation, which provided 70 percent of U.S. demand for the rosin "sizing" used to stiffen paper.

At the time of America's entrance into World War II Hercules was the country's largest producer of naval stores and the third-largest producer of explosives. Business was good during the war and company coffers were stuffed with legitimate and illegitimate gains. Hercules, Atlas, and Du Pont were convicted of a joint price-fixing scheme, and Du Pont was assessed a $40,000 dollar fine. Hercules' annual reports during this period concentrate on plans for reducing the company's size once the war ended because the demands of the war had swelled the company's workforce to twice its previous size.

Three years after the war ended Hercules emerged from what a later industry analyst called "a big sleep." The demand for nitrocellulose, paper chemicals, and naval stores, products Hercules was depending on in peacetime, was growing at a snail's pace. Sales were averaging an unremarkable $200 million a year. However, in the 1950s the company entered two markets it would later dominate: DMT and polypropylene.



Consistent with its "waste not, want not" approach to new chemicals, Hercules began to use waste gases from refineries to manufacture polypropylene, an increasingly important type of plastic. Polypropylene was used for food packaging, among other things. DMT is the chemical base for polyester fiber and was sold as a commodity to both chemical and polyester makers, including Du Pont. Besides these new products Hercules continued to look for new uses for naval stores from which it already derived chemicals used in insecticides, textiles, paints, and rubber.

Between 1955 and 1963 Hercules saw its sales double, due in large part to government contracts. In 1959 Hercules diversified into rocket fuels and propulsion systems for the Polaris, Minuteman, and Honest John missiles. Sales of aerospace equipment and fuels accounted for almost 10 percent of sales in 1961, 15 percent in 1962, and 25 percent in 1963. Throughout the Vietnam War Hercules continued to derive approximately 25 percent of its profits from rocket fuels, anti-personnel weapons, and specialty chemicals such as Agent Orange and napalm.

The man who presided over Hercules in the 1960s was George Thouron, a relative of the Du Ponts. He described Hercules' policy towards expansion as "sticking close to profit-producing fields." A profile in Fortune magazine describes Thouron as a quiet man. As the article noted, "his main interest is in his prize Guernsey cattle."

Thouron knew that the war in Indochina would not last forever, and undertook an ambitious reorientation of the company toward the production of plastics, polyester, and other petrochemicals. A contemporary observer remarked that "few companies have expanded further or faster than Hercules Inc." Herculon, the company's synthetic fabric, had garnered almost 11 percent of the market for upholstery material. A water soluble gum called CMC also made money for the company. CMC was as versatile as Herculon was stain-resistant: it made its way into products as diverse as ice cream, embalming fluid, diet products, and vaginal jelly. "From womb to tomb," one company pundit quipped.

In 1968, the company changed its name from Hercules Powder Company to Hercules Inc. The 1960s and early 1970s were an auspicious time for Hercules. Although the foray into plastics had required large capital and research expenditures that depressed earnings, Hercules remained a profitable and steadily growing company. High inflation actually helped the synthetics industry since the prices of natural fibers outpaced the cost of synthetics.

In 1973, however, Hercules learned that oil can be economically as volatile as nitroglycerin. The Arab Oil Embargo was a disaster for the petrochemical industry. And if the embargo were not enough, two years later the demand for naval stores crashed just months after a rosin shortage had been predicted. Hercules, anticipating a shortage, had ordered millions of pounds of rosin at twice the usual price. Around the time that the first rosin-laden ships arrived it became clear that Hercules' customers, also fearful of a shortage, were overstocked with the material. The rosin problem, combined with a drop in the fibers market, caused sales to drop 90 percent. Hercules stock went down 17 percent. The year 1975 was not a good one for most chemical companies, but the difficulties that Hercules experienced were more than its share.

Werner Brown was the company's president during these years. In 1977 he was promoted, and chose Alexander Giacco to be the next president. Hercules had become an inordinately large company; its overheads and the size of its workforce were both excessive. In his first year as president Giacco fired or forced into retirement 700 middle managers and three executive vice-presidents. Giacco had a managerial style that differed from that of the mild-mannered Brown, and Giacco's restructuring of the company reflected that. Giacco streamlined Hercules to make it more of a monarchy. "He runs the company like an extension of himself," said one analyst. In order to stay in touch with the various divisions, Giacco invested in advanced communications equipment and computers. He also reduced the managerial levels between himself and the foremen from 12 to six. His position in the company is suggested by his description of a new product. "I heard Gene Shalit say that candy wrapping paper made too much crinkling noise in movie houses. So we developed a candy wrapper that has no crinkle."

In many ways Giacco's plan for Hercules resembles the strategy his mentor, Werner Brown, mapped out in the early 1970s: shift from commodity to value-added (specialty) chemicals, get rid of unprofitable divisions, and derive more profits from existing product lines. Giacco also led the company away from its longstanding tradition of basic chemical research into more immediately profitable, application-based inquiry. After the fiasco in 1975 when two unrelated markets crashed at the same time, Hercules has experimented with the proper combination of products taking to heart the teachings of economist Charles Reeder: "There's a simple two word answer to why chemical company earnings vary all over the lot. The words are 'product mix."'

This product mix had eluded Hercules. One thing was certain, however; Hercules' mix would not include petrochemicals. In 1975, 43 percent of its fixable assets were in petrochemicals, but within a decade these assets were liquidated. Naval stores, responsible in 1985 for a decline in operating profits, also fell out of favor. Demand for CMC, the binding agent, declined because the oil industry was not using it for drilling. Propylene fibers and film, food flavors and fragrances (relatively new ventures) paper chemicals, aerospace, and graphite fibers were included in the future recipe for success. The company's plants for manufacturing DMT and explosives were among two dozen sold between 1975 and 1985.

One shining success during this period was the growth of the stagnant polypropylene market. Hercules entered into a joint venture with the Italian firm Montedison, with whom it had previously teamed up in the pharmaceutical company Adria Labs, in order to take advantage of Montedison's newly developed, extremely efficient process for manufacturing polypropylene. Because the material cost so little, Giacco promoted the use of it to replace other materials in all types of products, including cigarette filters. It was mixed with polyethylene to produce a synthetic wood pulp replacement.

The company's herbicide business, maintained during the 1960s, was not profitable and its liabilities continued to haunt Hercules well after it closed the Reasor-Hill plant in Jacksonville, Arkansas. After five years of class action litigation on behalf of U.S. veterans exposed to Agent Orange, the company paid $18 million in 1983 to settle claims in the case. Its product's extremely low levels of the impurity dioxin, which was perceived to be the primary pathogen in Agent Orange, mitigated the portion Hercules paid of the total $180 million settlement with several other manufacturers.

The overall success in its aerospace business segued nicely with its line of graphite composites, which had steadily gained acceptance during the 1970s to become a mainstay in high performance aircraft. In 1986, Dick Rutan and Jeana Yeager flew the company's Magnamite carbon composites into the history book when their experimental craft the Voyager circled the globe.

David Hollingsworth succeeded Giacco as chairman and CEO in 1987. After Hollingsworth sold the company's share of the HIMONT polypropylene venture to Montedison, Giacco resigned from the board, offended at the loss of a sure growth center. As in the last period after the top office changed hands, several poorly performing, mature businesses were sold off. Advanced materials and flavors and food ingredients--particularly natural additives based on pectin and carrageenan--were the focus of intended growth. The company bought out Henkel KgaA's share of the Aqualon Group, formed in 1986 to make cellulose derivatives and water-soluble polymers.

The 1990s were another period of readjustment. Hercules impressed investors with its 1991 introduction of Slendid, a fat substitute made from citrus pectin (it would first be used in a commercial product five years later, in J.R. Simplot frozen French fries). However, its aerospace unit, which surged forward in the late 1970s, suffered serious setbacks in its program to develop engines for the Titan IV program. Overall, the year was a disappointing start for a new CEO, Tom Gossage. He would devote the next five years to enhancing the company's value to shareholders, and succeeded in building Hercules' market value to nearly three times what it was when his tenure began (from $1.6 billion to $4.4 billion).

In 1996 another CEO, R. Keith Elliott, took the reigns at Hercules. The company's successful composites business was sold to Hexcel Corporation that year. A new, lower cost carrageenan plant was being built in the Philippines. Hercules entered a joint venture of its polypropylene fiber business with Jacob Holm & Sons A/S (Denmark) in 1997. Earlier it had signed agreements to co-produce hydrogenated hydrocarbon resins in China with the Beijing Yanshan Petrochemical Company. One of the smaller CMC subsidiaries, Aqualon do Brasil, was sold to Grupo Gusmao dos Santos. In 1997, Hercules and its partner Mallinckrodt Inc. sold their Tastemaker venture to Roche for $1.1 billion.

Hercules has been able to shed product lines that had once been crucial to its success once they lost their luster. With periodic management shakeups a part of the company's business cycle, the company seemed a giant limber enough to thrive in the unpredictable conditions of the next century.

Principal Subsidiaries: Hercules Fibers Argentina S.A.; Patex Chemie GmbH (Austria); Hercules International Trade Corporation Limited (HINTCO) (Bahamas); Hercules Belgium N.V.; S.A. Hercules Europe N.V. (Belgium); Curtis Bay Insurance Co., Ltd. (Bermuda); Hercules do Brasil Produtos Quimicos Ltda.; Genu Products Canada Ltd.; Hercules Canada Inc.; Quimica Hercules de Colombia S.A.; Hercules CZ s.r.o. (Czech Republic); Copenhagen Pectin A/S (Denmark); Hercules Limited (U.K.); Oy Hercofinn Ab (Finland); Aqualon France B.V.; Hercules S.A. (France); Hercules GmbH (Germany); Pomosin GmbH (Germany); Hercules China Limited (Hong Kong); Hercules Italia S.p.A.; Hercules Japan Ltd.; Hercules Fibras de Mexico, S.A. de C.V.; Quimica Hercules, S.A. de C.V. (Mexico); Hercules B.V. (Netherlands); Hercules Singapore Pte Ltd.; Hercules Quimica, S.A. (Spain); Hercules AB (Sweden); Hercules Overseas Corporation (Virgin Islands); Alga Marinas S.A. (Chile; 70%); Shanghai Hercules Chemicals Company, Ltd. (China; 60%); Abieta Chemie GmbH (Germany; 50%); P.T. Hercules Mas Indonesia (49%); Rika-Hercules Incorporated (Japan; 50%); Hercules Korea Chemical Co. Ltd. (99%); Taloquimia, S.A. (Mexico; 49%); Pakistan Gum Industries Limited (49%); Taiwan Hercules Chemicals Inc. (97%); Alliant Techsystems Inc. (30%); BHC Laboratories, Inc. (50%); Hercules-Sanyo, Inc. (50%).

Principal Divisions: Aqualon; Food Gums; Paper Technology; Resins; Fibers.

Additional Details

Further Reference

Brown, Werner C., and Alexander F. Goacco, Hercules Incorporated: A Study in Creative Chemistry, New York: Newcomen Society in North America, 1977."Building Successful Global Partnerships," Journal of Business Strategy, September/October 1988, pp. 12--15.Corbo, Vincent J., "Five Great Myths About Hercules," Merrill Lynch Chemical Conference, March 12, 1997, http://www.herc.com/abouthercules/news/speeches/031297vc.htm.Dyer, Davis, and David B. Sicilia, Labors of a Modern Hercules: The Evolution of a Chemical Company, Boston: Harvard Business School Press, 1990.Plishner, Emily S., and William Freedman, "The Labors of Hercules," Chemical Week, August 23, 1995, pp. 29--31.Rotman, David, "Hercules Looks to Regain R&D Strength," Chemical Week, May 1, 1996, pp. 56--57.

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