<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1995 COMMISSION FILE NUMBER 1-496
HERCULES INCORPORATED
A DELAWARE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 51-0023450
HERCULES PLAZA
WILMINGTON, DELAWARE 19894
TELEPHONE: 302-594-5000
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 AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF OCTOBER 31, 1995, 109,971,115 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 thousands, except per share)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES . . . . . . . . . . . . . . . . . . . . . $570,249 $680,955 $1,877,611 $2,066,958
Cost of sales . . . . . . . . . . . . . . . . . . . 366,656 465,554 1,220,877 1,432,362
Selling, general and administrative expenses . . . 80,183 88,740 261,124 270,666
Research and development . . . . . . . . . . . . . 13,513 14,859 43,286 48,466
Other operating expenses, net . . . . . . . . . . . 4,736 5,958 16,157 30,871
-------- -------- ---------- ----------
PROFIT FROM OPERATIONS . . . . . . . . . . . . . . 105,161 105,844 336,167 284,593
Equity in income of affiliated companies . . . . . 11,326 6,645 31,106 20,846
Interest and debt expense . . . . . . . . . . . . . 7,251 6,847 20,945 21,362
Other income (expense), net . . . . . . . . . . . . 10,966 (5,777) 30,833 (9,152)
-------- --------- ---------- -----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . 120,202 99,865 377,161 274,925
Provision for income taxes . . . . . . . . . . . . 39,890 33,836 128,355 91,908
-------- -------- ----------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 80,312 $ 66,029 $ 248,806 $ 183,017
======== ======== ========== ==========
EARNINGS PER SHARE . . . . . . . . . . . . . . . . $ 0.72 $ 0.55 $ 2.18 $ 1.52
======== ======== ========== ==========
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . $ 0.21 $ 0.19 $ 0.63 $ 0.57
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
SEPTEMBER 30 December 31
1995 1994
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 82,606 $ 111,637
Accounts and notes receivable . . . . . . . . . . . . . . 445,827 588,851
Inventories
Finished products . . . . . . . . . . . . . . . . 192,810 171,891
Materials, supplies, and work in process . . . . . 168,554 190,363
Deferred income taxes . . . . . . . . . . . . . . . . . . 70,073 89,573
---------- -----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . 959,870 1,152,315
Property, plant and equipment . . . . . . . . . . . . . . 2,571,788 3,100,749
Accumulated depreciation and amortization . . . . . . . . 1,561,710 1,884,694
---------- -----------
Net property, plant and equipment . . . . . . . . 1,010,078 1,216,055
Investments . . . . . . . . . . . . . . . . . . . . . . . 310,247 224,760
Other assets . . . . . . . . . . . . . . . . . . . . . . 292,942 $ 348,123
---------- ----------
$2,573,137 $2,941,253
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 117,314 $ 162,858
Accrued expenses . . . . . . . . . . . . . . . . . . . . 316,394 384,947
Short-term debt . . . . . . . . . . . . . . . . . . . . . 274,954 188,347
Income taxes payable . . . . . . . . . . . . . . . . . . 12,996 31,318
---------- -----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 721,658 767,470
Long-term debt . . . . . . . . . . . . . . . . . . . . . 248,008 307,217
Deferred income taxes . . . . . . . . . . . . . . . . . . 163,765 129,183
Postretirement benefits and other liabilities . . . . . . 336,093 442,702
STOCKHOLDERS' EQUITY
Common stock (issued 1995, 151,581,031;
1994, 149,115,459 shares) . . . . . . . . . . . . 78,949 77,665
Additional paid-in capital . . . . . . . . . . . . . . . 440,102 394,749
Foreign currency translation adjustment . . . . . . . . . 76,743 49,422
Retained earnings . . . . . . . . . . . . . . . . . . . . 1,652,478 1,474,329
---------- -----------
2,248,272 1,996,165
Reacquired stock, at cost (1995, 41,183,750;
1994, 32,480,067 shares) . . . . . . . . . . . . 1,144,659 701,484
---------- -----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 1,103,613 1,294,681
---------- -----------
$2,573,137 $2,941,253
========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Sept. 30
1995 1994
---- ----
<S> <C> <C>
NET CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . $ 250,554 $ 152,426
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,015) (110,299)
Proceeds of investment and fixed asset disposals . . . . . . . . . . . . . . 266,332 180,026
Cash received from (invested in) unconsolidated affiliates . . . . . . . . . (5,641) 1,939
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,537 (327)
--------- -----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES . . . . . . . . . . . . . . 198,213 71,339
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,031 41,088
Long-term debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (75,621) (136,167)
Change in short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 85,606 145,936
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,606 8,221
Common stock reacquired . . . . . . . . . . . . . . . . . . . . . . . . . . . (475,246) (289,544)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70,665) (67,118)
---------- -----------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . (477,289) (297,584)
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . (509) (694)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . (29,031) (74,513)
Cash and cash equivalents - beginning of period . . . . . . . . . . . . . . . 111,637 154,628
--------- ----------
Cash and cash equivalents - end of period . . . . . . . . . . . . . . . . . . $ 82,606 $ 80,115
========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . . . . $ 21,400 $ 17,774
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,281 151,044
Noncash investing and financing activities:
Conversion of notes and debentures . . . . . . . . . . . . . . . . . . . 27,618 30,875
Accounts payable for common stock acquisitions . . . . . . . . . . . . . -- 10,781
Incentive plan stock issuances . . . . . . . . . . . . . . . . . . . . . 29,545 28,168
Investment in Alliant Techsystems, Inc. . . . . . . . . . . . . . . . . 143,862 --
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
1. These condensed financial statements are unaudited, but in the opinion
of management include all adjustments (consisting of only normal accruals)
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 1994.
Pursuant to the divestiture of the Aerospace segment in March 1995,
Composite Materials data is included in segment Other. Previously it was
reported in the Aerospace segment. 1994 information has been restated to
conform with the 1995 presentation.
2. Primary earnings per share are calculated on the basis of average
number of common and common equivalent shares of 111,415,472 for the quarter
ended September 30, 1995; 114,365,786 for the nine months ended September 30,
1995; 118,958,034 for the quarter ended September 30, 1994; and 120,541,260 for
the nine months ended September 30, 1994. Net income has been adjusted to
reflect the elimination of interest expense, net of taxes, on the 6.5%
convertible debentures in the following amounts:
<TABLE>
<CAPTION>
September 30
1995 1994
-------- --------
<S> <C> <C>
Three months ended . . . . . . . . . . . . . $ 26 $ 90
Nine months ended . . . . . . . . . . . . . 93 202
</TABLE>
Fully diluted earnings per share, which additionally assumes conversion of the
8% convertible subordinated debentures, is not materially different from
primary earnings per share. In the fully diluted computation, the number of
shares is increased by 2,899,968 for the quarter ended September 30, 1995;
3,299,878 for the nine months ended September 30, 1995; 4,526,067 for the
quarter ended September 30, 1994; and 5,042,199 for the nine months ended
September 30, 1994. Net income is further adjusted in the quarter and
nine-month periods for both 1995 and 1994 to reflect the elimination of
interest expense on the 8% debentures (net of taxes) in the amount of $551 and
$1,662, respectively for 1995, and $1,034 and $2,983, respectively for the
corresponding periods in 1994.
3. Cost and expenses include depreciation and amortization as follows:
<TABLE>
<CAPTION>
September 30
1995 1994
-------- --------
<S> <C> <C>
Three months ended . . . . . . . . . . . . . $ 31,930 $ 36,515
Nine months ended . . . . . . . . . . . . . 100,744 111,838
</TABLE>
4. Other operating expenses, net for the quarter and nine months ended
September 30, 1995, include environmental cleanup costs, principally for
nonoperating sites, of $3,521 and $12,461, respectively. Additionally, the
nine-month period reflects employee separation costs and write-offs of $3,696.
The quarter and nine months ended September 30, 1994,
5
<PAGE> 6
included environmental cleanup costs for nonoperating sites of $4,095 and
$14,699, respectively, and employee separation charges and write-offs of
$1,863 and $16,192 for the respective periods.
5. Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
September 30
1995 1994
-------- ------
<S> <C> <C>
Three Months Ended:
Costs incurred $ 8,575 $ 9,018
Amount capitalized 1,324 2,171
------- -------
Interest expense $ 7,251 $ 6,847
======= =======
Nine Months Ended:
Costs incurred $24,235 $26,897
Amount capitalized 3,290 5,535
------- -------
Interest expense $20,945 $21,362
======= =======
</TABLE>
6. Other income (expense), net for the quarter ended September 30, 1995,
includes $7,000 of additional gain related to final settlement of the sale of
the Aerospace segment and additional recoveries of costs under a contract
related to the former Aerospace business.
The nine months ended September 30, 1995, include the net gain on the
divestiture of the Aerospace segment to Alliant Techsystems, Inc. (Alliant) of
$38,700. Included in the net gain are pension curtailment and settlement
losses aggregating $60,723 and a postretirement benefit curtailment gain of
$24,540, resulting from the transfer of the defined-benefit pension and
postretirement benefit obligations and related defined-benefit plan assets to
Alliant. The divestiture was completed on March 15, 1995. Net sales of this
segment were $146,601 for the quarter ended September 30, 1994, and $123,414
and $447,929 for the nine-month periods ended September 30, 1995 and 1994,
respectively. Operating profits were $17,993 for the quarter ended September
30, 1994, and $13,306 and $44,908 for the nine-month period ended September 30,
1995 and 1994, respectively. Hercules now holds approximately a 27% ownership
interest in Alliant accounted for on the equity method. The nine months also
include the aforementioned cost recoveries and foreign exchange contracts
and translation losses of $12,073.
Other income (expense), net for the quarter ended September 30, 1994,
includes lower shutdown costs related to the St. Croix joint venture, offset by
the loss on the disposition of the LMR business, provisions related to ongoing
litigation, foreign currency losses, and minority interest. Additionally, the
nine-month period ended September 30, 1994, includes a gain from the sale of an
investment.
6
<PAGE> 7
7. Dividends received from affiliated companies accounted for on the
equity method were as follows:
<TABLE>
<CAPTION>
September 30
1995 1994
-------- --------
<S> <C> <C>
Three months ended . . . . . . . . . . . . . . . . . . . $ 5,771 $ 1,829
Nine months ended . . . . . . . . . . . . . . . . . . . 12,317 10,356
</TABLE>
8. A summary of short-term and long-term debt follows:
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
-------- --------
<S> <C> <C>
SHORT-TERM:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . $183,000 $100,000
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,739 35,600
Current maturities . . . . . . . . . . . . . . . . . . . . . . . 50,215 52,747
-------- --------
$274,954 $188,347
======== ========
</TABLE>
At September 30, 1995, Hercules had $60,511 of unused lines of credit that may
be drawn as needed. Lines of credit in use or supporting commercial paper at
September 30, 1995, were $36,976.
<TABLE>
<CAPTION>
LONG-TERM:
<S> <C> <C>
6.625% notes due 2003 . . . . . . . . . . . . . . . . . . . . . $124,856 $124,842
6.5% convertible subordinated debentures due 1999 . . . . . . . . 2,274 4,242
8% convertible subordinated debentures due 2010 . . . . . . . . . 41,255 66,905
7.85% notes due 2000 . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
Term loans due 1994-1995 . . . . . . . . . . . . . . . . . . . . 52,382 52,393
Variable rate loans (a) . . . . . . . . . . . . . . . . . . . . . 44,600 75,400
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,856 11,182
------- -------
298,223 359,964
Current maturities of long-term debt . . . . . . . . . . . . . . (50,215) (52,747)
-------- ---------
Net long-term debt . . . . . . . . . . . . . . . . . . . . . . . $248,008 $307,217
======== ========
</TABLE>
(a) Uncollateralized bank borrowings with average maturities of 400 days,
with interest at a negotiated spread over lenders' cost of funds.
9. Since 1991, the Board of Directors has authorized the repurchase of up
to 47,850,000 shares of company common stock, 4,350,000 shares of which is
intended to satisfy requirements of various employee benefit programs. Through
September 30, 1995, a total of 44,690,799 shares of common stock (including
4,350,000 shares for employee benefit programs) had been purchased in the open
market at an average price of $30.98 per share.
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<PAGE> 8
10. On September 28, 1995, Hercules announced that it had signed a letter
of intent to sell its Electronics and Printing Division to MacDermid
Incorporated for $130 million in cash and preferred stock. The
sale is expected to close by year end and result in a gain.
Net sales for this unit, which are reported as part of the Food &
Functional Products segment, were $18,302 and $53,706 for the three and nine
months ended September 30, 1995, and $16,389 and $49,275 for the comparable
periods ended September 30, 1994. Operating profit for the three and nine
months ended September 30, 1995, were $5,102 and $13,333 respectively, and
$3,209 and $8,998 for the comparable periods ended September 30, 1994.
11. Commitments and Contingencies
(a) Environmental
Hercules has been identified as a potentially responsible party (PRP)
by U.S. Federal and State authorities for environmental cleanup at numerous
sites. The estimated range of the reasonably possible costs of remediation is
between $57,000 and $241,000. 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 of Hercules'
activities at sites under investigation. Hercules brought suit in late 1992
against its insurance carriers for past and future costs for remediation of
certain environmental sites. Hercules has not included any insurance recovery
in the estimates set forth above.
Hercules has established procedures for identification of
environmental issues at Hercules plant sites. Hercules designates an
environmental coordinator at all operating facilities. Environmental
coordinators are familiar with environmental laws and regulations and are
resources for identification of environmental issues. Hercules also has an
environmental audit program which is designed to identify environmental issues
at operating plant sites. Through these programs, Hercules identifies
potential environmental, regulatory, and remedial issues.
Litigation over liability at Jacksonville, Arkansas, the most
significant site, has been pending since 1980. As a result of a pretrial court
ruling in October 1993, Hercules has been held jointly and severally liable for
costs incurred and for future remediation costs at the Jacksonville site by the
District Court, Eastern District of Arkansas (the Court). Appeal of the
Court's ruling with respect to the finding of Hercules being jointly and
severally liable will be filed promptly after issuance of a final court order.
In mid-November 1993, an advisory jury found Uniroyal Chemical, Ltd., liable
for the Jacksonville site, but also found that Uniroyal had proven a reasonable
basis for allocation of responsibility. That same advisory jury found that
Standard Chlorine of Delaware is not a liable party for the Jacksonville site.
The Court
8
<PAGE> 9
may take the jury's findings into consideration when reaching its decision
regarding these parties. The Court has not entered its ruling on the liability
of Uniroyal and Standard Chlorine. Appeals of the Court's expected rulings
with respect to Uniroyal and Standard Chlorine are probable.
Other defendants in this litigation have either settled with the
Government or, in the case of the Department of Defense, have not been held
liable. Hercules appealed the Court's order finding the Department of Defense
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 has been remanded to the District Court for
further proceedings.
Hercules' potential costs for remediation of the Jacksonville site are
presently estimated between $21,000 and $146,000. Hercules' potential costs
are based on its assessment of potential liability, the level of participation
by other PRPs and upon current estimates of the costs to remediate the
Jacksonville site. The costs to remediate will vary as Records of Decision are
issued on each operable unit of the site and as remediation methods are
approved by the EPA.
At September 30, 1995, 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.
(b) Litigation
Hercules is a defendant in numerous lawsuits that arise out of, and
are incidental to, the conduct of its business. In these legal proceedings, no
director, officer, or affiliate is a party or a named defendant. These suits
concern issues such as product liability, contract disputes, labor-related
matters, patent infringement, environmental proceedings and personal injury
matters. Hercules also is a defendant in one Federal Administrative Law
Proceeding and two Qui Tam ("Whistle Blower") lawsuits brought by former
employees.
While it is not feasible to predict the outcome of all pending suits
and claims, management does not anticipate that the ultimate resolution of
these matters will have a material effect upon the consolidated financial
position of Hercules, although the resolution of any of the matters during a
specific period could have a material effect on the quarterly or annual
operating results for that period.
9
<PAGE> 10
OTHER FINANCIAL INFORMATION
OPERATIONAL HIGHLIGHTS
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES BY INDUSTRY SEGMENT
Chemical Specialties . . . . . . . . . . . . . . . . $ 286 $ 271 $ 874 $ 798
Food & Functional Products . . . . . . . . . . . . . 260 243 804 709
Aerospace . . . . . . . . . . . . . . . . . . . . . . 0 147* 123** 448*
Other . . . . . . . . . . . . . . . . . . . . . . . . 25 20* 77 112*
------ ----- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 571 $ 681 $ 1,878 $ 2,067
===== ===== ======= =======
PROFIT FROM OPERATIONS BY INDUSTRY SEGMENT
Chemical Specialties . . . . . . . . . . . . . . . . $ 55 $ 53 $ 175 $ 149
Food & Functional Products . . . . . . . . . . . . . 56 43 162 116
Aerospace . . . . . . . . . . . . . . . . . . . . . . 0 18* 13** 45*
Other . . . . . . . . . . . . . . . . . . . . . . . . (6) (8)* (14) (25)*
------ ----- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 105 $ 106 $ 336 $ 285
====== ===== ====== =======
</TABLE>
* Pursuant to the divestiture of the Aerospace segment in March 1995,
Composite Materials' data is included in segment Other. Previously it was
reported in the Aerospace segment. 1994 information has been restated to
conform with the 1995 presentation.
** Reflects results of operations through March 14, 1995.
10
<PAGE> 11
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 "nine-month period" refer to the third quarter of 1995 and the nine months
ended September 30, 1995. All comparisons are with the corresponding periods
in the previous year.
Chemical businesses (Chemical Specialties and Food & Functional
Products segments) sales increased $32 million or 6% and $171 million or 11%
respectively for the quarter and nine-month period. Stronger foreign
currencies relative to the dollar and higher selling prices primarily account
for the improvement. On a consolidated basis, however, net sales declined 16%
for the quarter and 9% for the nine-month period, reflecting the divestiture of
the Aerospace segment in March 1995, and the Packaging Films business unit in
April 1994.
Profit from operations for the Chemical businesses increased $15
million or 16% for the quarter and $72 million or 27% for the nine-month
period, primarily because of increased revenues, partially offset by higher raw
material costs. Gross margins for the Chemical businesses rose to 37% for the
quarter and nine-month period from 35% for the corresponding 1994 periods. On
a consolidated basis, profit from operations remained flat for the quarter
while increasing $51 million or 18% for the nine-month period. These
consolidated results reflect the Chemical businesses' performance offset by the
loss of profits associated with the aforementioned divested businesses.
Selling, general, and administrative expenses declined for the quarter
and nine-month period. Higher charges for stock-based incentive compensation
plans, resulting from the increases in Hercules' stock price, and stronger
foreign currencies were more than offset by cost reduction initiatives and the
effect of business divestitures. Research and development expenses also
declined for the quarter and nine- month periods, principally as a result of
business divestitures. Other operating expenses declined for the quarter and
nine-month period, primarily due to lower employee separation costs in 1995.
Year-over-year percentage growth in operating profit in the Chemical
businesses is not expected to continue at the current pace. Increases in costs
of inputs coupled with softening in demand may erode some of the operating
profit gains.
Chemical Specialties: Net sales increased $15 million or 6% for the
quarter and $76 million or 10% for the nine-month period. The sales increases
for the quarter and nine months relate primarily to stronger foreign
currencies, improved pricing, and increased sales of higher value products,
partially offset by lower volumes. Operating profit improved by $2 million or
4% for the quarter while increasing $26 million or 17% for the nine-month
period. In addition to higher sales revenues, the operating profit
improvements primarily reflect manufacturing cost reductions, partially offset
by higher raw material costs and increased costs associated with stock-based
incentive compensation programs.
11
<PAGE> 12
Food & Functional Products: Net sales increased $17 million or 7% for
the quarter and $95 million or 13% for the nine- month period. While volumes
declined slightly due to softening demand in the third quarter, higher selling
prices and stronger foreign currencies contributed to the growth in sales.
Operating profit increased $13 million or 30% for the quarter and $46 million
or 40% for the nine-month period and primarily relates to the increase in sales
revenues, coupled with manufacturing cost improvements, partially offset by
higher raw material costs and increased costs of stock-based incentive
compensation programs.
Other: Net sales for the quarter increased $5 million while
declining $35 million for the nine-month period. The quarterly increase
reflects improvement in Composite Materials while the decline for the
nine-month period relates primarily to the divestiture of the Packaging Films
business unit in April 1994. Operating losses declined for the quarter and
nine-month period primarily related to improvement in Composite Materials.
Increase in equity income of affiliated companies of approximately $5
million for the quarter and $10 million for the nine-month period reflects
higher earnings in Tastemaker, the 50% owned flavors joint venture, along with
equity earnings from Hercules' investment in Alliant Techsystems, Inc.,
acquired in March 1995, in conjunction with the divestiture of the Aerospace
segment.
Interest and debt costs incurred declined for the quarter and
nine-month period, principally due to lower average debt outstanding.
Other income (expense) net reflects a favorable change of $17 million
for the quarter and $40 million for the nine-month period (see Note 6).
During the quarter, the expected annual 1995 effective tax rate was
revised to 35.0% from 35.8% in anticipation of lower foreign tax rates. The
provision for income taxes for the nine months reflects this change, combined
with a relatively high rate on the sale of the Aerospace segment in the first
quarter and a relatively low rate in the second quarter due to a favorable
state income tax settlement related to the prior year sale of an investment.
The 1994 full-year rate of 33% was favorably affected by a research and
experimentation tax credit of $4 million.
FINANCIAL CONDITION
Cash flow from operations was $250 million for the nine-month period
compared to $152 million for the corresponding 1994 period. Improved operating
earnings and lower income tax payments, offset by higher working capital
requirements, resulted in the increase in cash flow. Income tax payments in
the first quarter of 1994 included payments of approximately $45 million
associated with the restructuring of the Titan IV solid rocket motor upgrade
contract in late 1993. On September 28, 1995, Hercules announced that it had
signed a letter of intent to sell its Electronics and Printing Division to
MacDermid Incorporated for $130 million in cash and preferred
stock. The sale is expected to close by year end and result in a gain. After
funding the needs of the business, it is expected that net cash proceeds from
the sale will be used primarily to repurchase Hercules shares.
12
<PAGE> 13
Short-term liquidity has remained stable since year-end 1994. Both
the current ratio and the quick ratio are relatively flat at 1.3 and 0.7,
respectively. At September 30, 1995, $61 million was available under
short-term lines of credit.
During the nine-month period, an additional 9,615,399 shares of common
stock were reacquired in the open market. Also, during the second quarter a
change was adopted increasing the deductible for property insurance to $50
million. This change, which lowers premium costs, was prompted by the
favorable loss experience in the Chemical business and the divestiture of the
Aerospace segment. As a percentage of total capitalization, total debt
increased from 28% to 32% during the nine-month period. Funds available under
revolving credit agreements at September 30, 1995, are $197 million; in
addition, $50 million is accessible, depending upon market conditions, under a
shelf registration.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1993, Hercules and the U.S. Environmental Protection
Agency (EPA) Region 1 reached an agreement in principle in settlement of EPA's
claims that Hercules violated its wastewater permit with the City of Chicopee
and the federal pretreatment standard for industrial users of publicly owned
treatment works at its Chicopee, Massachusetts, facility. Hercules signed a
Consent Decree (the "Decree"), which was entered by the court on December 15,
1994, based on this agreement requiring supplemental environmental projects (at
a cost of approximately $375,000), compliance with permit limits in the future,
and $250,000 in fines. Hercules has paid the $250,000 fine and is currently in
the process of performing the supplemental environmental projects.
Hercules received a letter from the New Jersey Department of
Environmental Protection (the "Department") dated March 9, 1995, which stated
that the Department was considering an enforcement action against Hercules for
alleged noncompliance with the terms of a 1993 Administrative Consent Order
("ACO") at its Kenvil, New Jersey, facility. The ACO covered alleged
violations of the Air Pollution Control Act. The letter also identified
potential violations under the Spill Compensation and Control Act, the New
Jersey Water Pollution Control Act, and the New Jersey Safe Drinking Water Act.
Hercules has met with the Department and has submitted a schedule addressing
all matters identified in the Department's letter. Although no formal legal
proceeding has been commenced, a civil enforcement action, including a penalty
assessment in excess of $100,000 is expected.
Hercules received a letter from the U.S. Department of Justice ("DoJ")
dated May 3, 1995 in which it was notified of the U.S. Environmental
Protection Agency's request that a complaint be filed against Hercules for
violations of the Clean Air Act and the National Emission Standard for
Hazardous Air Pollutants for Asbestos that allegedly occurred during demolition
activities at its former Covington, Virginia, facility.
On September 7, 1995, Hercules signed a Consent Decree in settlement
of the matter. The Consent Decree obligates Hercules to pay a civil penalty of
$1.2 million to provide asbestos training to select personnel and to appoint an
official responsible for asbestos compliance company-wide. DoJ signed the
Consent Decree and lodged it with the Federal District Court in Virginia on
October 12, 1995. After a 30-day public comment period commencing on that
date, the Consent Decree will presumably be entered by the Court.
14
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
Hercules was not required to file any reports on Form 8-K
for the quarter ended September 30, 1995.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hercules Incorporated
by George MacKenzie
------------------------------------------
George MacKenzie
Vice President and
Chief Financial Officer
(Principal Financial Officer
and duly authorized signatory) November
14, 1994
by Vikram Jog
------------------------------------------
Vikram Jog
Controller (Principal
Accounting Officer) November
14, 1994
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Hercules Incorporated 3Q95 10Q Exhibit 27-Financial Data Schedule
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 82,606
<SECURITIES> 0
<RECEIVABLES> 445,827
<ALLOWANCES> 0
<INVENTORY> 361,364
<CURRENT-ASSETS> 959,870
<PP&E> 2,571,788
<DEPRECIATION> 1,561,710
<TOTAL-ASSETS> 2,573,137
<CURRENT-LIABILITIES> 721,658
<BONDS> 0
<COMMON> 78,949
0
0
<OTHER-SE> 1,024,664
<TOTAL-LIABILITY-AND-EQUITY> 2,573,137
<SALES> 1,877,611
<TOTAL-REVENUES> 1,877,611
<CGS> 1,220,877
<TOTAL-COSTS> 1,541,444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,945
<INCOME-PRETAX> 377,161
<INCOME-TAX> 128,355
<INCOME-CONTINUING> 248,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 248,806
<EPS-PRIMARY> 2.18
<EPS-DILUTED> 0
</TABLE>
