<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------
Commission file number 1-496
-----
HERCULES INCORPORATED
A Delaware Corporation
I.R.S. Employer Identification No. 51-0023450
Hercules Plaza
1313 North Market Street
Wilmington, Delaware 19894-0001
Telephone: 302-594-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--------- ---------
As of October 31, 1996, 102,361,084 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,
------------------------------- ------------------------------
1996 1995 1996 1995
------------ ----------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES . . . . . . . . . . . . . . . . . . . . . $518,063 $570,249 $1,565,569 $1,877,611
Cost of sales . . . . . . . . . . . . . . . . . . . 326,489 366,656 1,006,247 1,220,877
Selling, general, and administrative expenses . . . 64,319 80,183 195,908 261,124
Research and development . . . . . . . . . . . . . 13,893 13,513 41,524 43,286
Other operating expenses (income), net . . . . . . (13,502) 4,736 (19,964) 16,157
--------- -------- ----------- ----------
PROFIT FROM OPERATIONS . . . . . . . . . . . . . . 126,864 105,161 341,854 336,167
Equity in income of affiliated companies . . . . . 12,262 11,326 42,106 31,106
Interest and debt expense . . . . . . . . . . . . . 8,804 7,251 25,665 20,945
Other income (expense), net . . . . . . . . . . . . (2,143) 10,966 17,966 30,833
--------- -------- ---------- ----------
INCOME BEFORE TAXES . . . . . . . . . . . . . . . . 128,179 120,202 376,261 377,161
Provision for income taxes . . . . . . . . . . . . 43,306 39,890 127,025 128,355
--------- -------- ----------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 84,873 $ 80,312 $ 249,236 $ 248,806
========= ======== ========== ==========
EARNINGS PER SHARE . . . . . . . . . . . . . . . . $ .80 $ 0.72 $ 2.31 $ 2.18
========= ======== ========== ==========
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . $ 0.23 $ 0.21 $ 0.69 $ 0.63
========= ======== ========== ==========
</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,
------------- --------------
1996 1995
------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 27,430 $ 72,941
Accounts and notes receivable, net . . . . . . . . . . . 413,985 425,865
Inventories
Finished products . . . . . . . . . . . . . . . . 157,253 167,793
Materials, supplies, and work in process . . . . . 136,557 140,287
Deferred income taxes . . . . . . . . . . . . . . . . . . 60,194 60,247
------------ --------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . 795,419 867,133
Property, plant, and equipment . . . . . . . . . . . . . 2,376,100 2,564,240
Accumulated depreciation and amortization . . . . . . . . 1,507,293 1,564,543
------------ --------------
Net property, plant, and equipment . . . . . . . . 868,806 999,697
Investments . . . . . . . . . . . . . . . . . . . . . . . 358,950 344,273
Other assets . . . . . . . . . . . . . . . . . . . . . . 331,015 282,376
------------ --------------
$ 2,354,191 $ 2,493,478
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 125,978 $ 117,030
Accrued expenses . . . . . . . . . . . . . . . . . . . . 255,729 312,565
Short-term debt . . . . . . . . . . . . . . . . . . . . . 337,759 206,799
Income taxes payable . . . . . . . . . . . . . . . . . . 78,428 50,327
------------ --------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 797,894 686,721
Long-term debt . . . . . . . . . . . . . . . . . . . . . 284,979 297,855
Deferred income taxes . . . . . . . . . . . . . . . . . . 52,344 94,946
Postretirement benefits and other liabilities . . . . . . 313,378 332,080
STOCKHOLDERS' EQUITY
Common stock (issued: 1996--152,240,398;
1995--151,663,465 shares) . . . . . . . . . . . . 79,293 78,992
Additional paid-in capital . . . . . . . . . . . . . . . 488,885 471,749
Foreign currency translation adjustment . . . . . . . . . 49,706 74,687
Retained earnings . . . . . . . . . . . . . . . . . . . . 1,888,585 1,712,286
------------ --------------
2,506,468 2,337,714
Reacquired stock, at cost (1996--49,325,690;
1995--43,176,841 shares) . . . . . . . . . . . . . . . . 1,600,872 1,255,838
------------ --------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 905,596 1,081,876
------------ --------------
$ 2,354,191 $ 2,493,478
============ ==============
</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,
---------------------------
1996 1995
--------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . $165,219 $250,554
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,645) (77,015)
Proceeds of investment and fixed asset disposals . . . . . . . . . . . . . . 154,746 266,332
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,070) 8,896
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . 76,031 198,213
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,026 45,031
Long-term debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (25,427) (75,621)
Change in short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 130,960 85,606
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,355 13,606
Common stock reacquired . . . . . . . . . . . . . . . . . . . . . . . . . . . (345,176) (475,246)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (72,937) (70,665)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . (286,199) (477,289)
--------- ---------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . (562) (509)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . (45,511) (29,031)
Cash and cash equivalents - beginning of period . . . . . . . . . . . . . . . 72,941 111,637
--------- ---------
Cash and cash equivalents - end of period . . . . . . . . . . . . . . . . . . $ 27,430 $ 82,606
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . . . . $ 21,542 $ 21,400
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,834 76,281
Noncash investing and financing activities:
Conversion of notes and debentures . . . . . . . . . . . . . . . . . . . 475 27,618
Accounts payable for common stock acquisitions . . . . . . . . . . . . . 11,461 --
Incentive plan stock issuances . . . . . . . . . . . . . . . . . . . . . 15,208 29,545
Investment in unconsolidated affiliates . . . . . . . . . . . . . . . . 600 143,862
Accounts receivable from sale of
investments/asset disposals . . . . . . . . . . . . . . . . . 10,757 --
</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 1995.
2. Primary earnings per share are calculated on the basis of average
number of common and common equivalent shares of 105,886,331 for the quarter
ended September 30, 1996; 108,042,269 for the nine months ended September 30,
1996; 111,415,472 for the quarter ended September 30, 1995; and 114,365,786 for
the nine months ended September 30, 1995. 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,
-----------------------
1996 1995
------ -----
<S> <C> <C>
Three months ended . . . . . . . . . . . . . . . $ 19 $ 26
Nine months ended . . . . . . . . . . . . . . . 39 93
</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 2,736,959 for the quarter ended September
30, 1996; 2,740,610 for the nine months ended September 30, 1996; 2,899,968 for
the quarter ended September 30, 1995; and 3,299,878 for the nine months ended
September 30, 1995. Net income is further adjusted in the quarter and
nine-month periods for both 1996 and 1995 to reflect the elimination of
interest expense on the 8% debentures (net of taxes) in the amount of $533 and
$1,655, respectively for 1996, and $551 and $1,662, respectively for the
corresponding periods in 1995.
3. Cost and expenses include depreciation as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
------- --------
<S> <C> <C>
Three months ended . . . . . . . . . . . . . . . $22,391 $ 31,930
Nine months ended . . . . . . . . . . . . . . . 82,823 100,744
</TABLE>
During the third quarter, the Company revised its estimates of useful
lives of certain machinery and equipment. The change was made to better reflect
the estimated periods during which assets will remain in service and had the
effect of reducing depreciation expense by $5,467 for the quarter and nine
months ended September 30, 1996.
5
<PAGE> 6
4. Other operating expenses (income) for the quarter and nine months
ended September 30, 1996, include probable recoveries related to
environmental remediation of $12,750. Additionally, the nine-month period
includes reduction in the estimated loss on the divestiture of the Composite
Products Division of $5,000. The quarter and nine months ended September 30,
1995, included environmental cleanup costs for nonoperating sites of $3,521 and
$12,461, respectively.
5. Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1995
--------- --------
<S> <C> <C>
Three Months Ended:
Costs incurred . . . . . . . . . . . . . . . . $ 9,905 $ 8,575
Amount capitalized . . . . . . . . . . . . . . 1,101 1,324
-------- --------
Interest expense . . . . . . . . . . . . . . . $ 8,804 $ 7,251
======== ========
Nine Months Ended:
Costs incurred . . . . . . . . . . . . . . . . $ 29,482 $ 24,235
Amount capitalized . . . . . . . . . . . . . . 3,818 3,290
-------- --------
Interest expense . . . . . . . . . . . . . . . $ 25,665 $ 20,945
======== ========
</TABLE>
6. Other income (expense) for the nine months ended September 30, 1996
reflects net foreign currency gains of $8,421, and gains on the sale of real
estate of $10,979. Other income (expense) for the quarter ended September 30,
1995, included $7,000 of additional gain related to the 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, primarily reflect the net gain on the divestiture of the
Aerospace segment of $38,700, the aforementioned cost recoveries and foreign
exchange contracts and translation losses of $12,073.
7. Dividends received from affiliated companies accounted for on the
equity method were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
------- --------
<S> <C> <C>
Three months ended . . . . . . . . . . . . . . . $2,301 $ 5,771
Nine months ended . . . . . . . . . . . . . . . 8,290 12,317
</TABLE>
6
<PAGE> 7
8. A summary of short-term and long-term debt follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
------------- ------------
1996 1995
------------- ----------
<S> <C> <C>
SHORT-TERM:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . $300,000 $160,000
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,519 46,577
Current maturities . . . . . . . . . . . . . . . . . . . . . 240 222
-------- --------
$337,759 $206,799
======== ========
</TABLE>
At September 30, 1996, Hercules had $51,190 of unused lines of credit that may
be drawn as needed. Lines of credit in use or supporting commercial paper at
September 30, 1996, were $36,090.
<TABLE>
<S> <C> <C>
LONG-TERM:
Term loans due 1997-2000 . . . . . . . . . . . . . . . . . . . . $ 95 $ 804
6.5% convertible subordinated debentures due 1999 . . . . . . . . 1,666 1,981
7.85% notes due 2000 . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
6.625% notes due 2003 . . . . . . . . . . . . . . . . . . . . . . 124,875 124,861
8% convertible subordinated debentures due 2010 . . . . . . . . . 40,969 41,130
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Variable rate loans . . . . . . . . . . . . . . . . . . . . . . . 35,200 46,600
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,414 7,701
------------- -----------
285,219 298,077
Current maturities of long-term debt . . . . . . . . . . . . . . (240) (222)
------------- -----------
Net long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 284,979 $ 297,855
============ ===========
</TABLE>
9. Since 1991, the Board of Directors has authorized the repurchase of up
to 64,650,000 shares of company common stock, 6,150,000 shares of which is
intended to satisfy requirements of various employee benefit programs. Through
September 30, 1996, a total of 53,155,120 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 $34.81 per share.
10. In June 1996, the company completed the divestiture of its Composite
Products Division for $135 million in cash, subject to post-closing
adjustments. Net sales and operating profit of this division, which are
reported as part of the Corporate and Other segment for the six months ended
June 30, 1996, were $48,597 and $8,033, respectively. For the three months and
nine months ended September 30, 1995 net sales and operating profit were
$24,055 and $1,690 and $72,308 and $4,921, respectively.
7
<PAGE> 8
11. Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The
provisions of SFAS No. 121 require the Company to review its long-lived assets
for impairment on an exception basis whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through future cash flows. If it is determined that an impairment
loss has occurred based on expected future cash flows, then the loss is
recognized in the income statement and certain disclosures regarding the
impairment are made in the financial statements. The adoption of SFAS No. 121
did not have an effect on the Company's consolidated financial statements.
12. 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 $80,000 and $245,000. 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 on Hercules'
activities at sites under investigation. Hercules brought suit in 1992 against
its insurance carriers for past and future costs for remediation of certain
environmental sites. Hercules has not included any insurance recovery in the
estimates set forth above.
Hercules has established procedures for identifying environmental
issues at Hercules plant sites. Environmental coordinators, a designated
position at all operating facilities, are familiar with environmental laws and
regulations and are resources for identification of environmental issues.
Hercules also has an environmental audit program, which is designed to identify
environmental issues at operating plant sites. Through these programs,
Hercules identifies potential environmental, regulatory, and remedial issues.
Litigation over liability at Jacksonville, Arkansas, the most
significant site, has been pending since 1980. As a result of a pretrial court
ruling in October 1993, Hercules has been held jointly and severally liable for
costs incurred, and for future remediation costs, at the Jacksonville site by
the District Court, Eastern District of Arkansas (the Court). Appeal of the
Court's ruling will be filed promptly after issuance of a final court order.
In 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 Standard
Chlorine of Delaware is not a liable party for the Jacksonville site. The
Court 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.
8
<PAGE> 9
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 $33,000 and $109,000. These costs are based on
Hercules' assessment of potential liability, the level of participation by
other PRPs, and current estimates of remediation costs. Remediation costs 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, 1996, 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, property damage, and
personal injury matters. Hercules also is a defendant in two Qui Tam ("Whistle
Blower") lawsuits brought by former employees of the Aerospace segment sold to
Alliant Techsystems. One suit involves allegations relating to submission of
false claims and records, delivery of defective products, and a deficient
quality control program. The other suit involves allegations of mischarging of
work performed under government contracts, misuse of government equipment,
other acts of financial mismanagement, and wrongful termination claims. The
government, after investigation of the allegations, declined to intervene in
either lawsuit. The first of these lawsuits is presently scheduled for trial
in 1997. While damages claimed in the first suit are material, the
Company believes no damages were incurred by the government, no false claims
were made to the government, and alleged damages are speculative and
insupportable. The damages in the second suit were not defined. The Company
intends to vigorously defend these lawsuits.
9
<PAGE> 10
Hercules is also a defendant in a class action (approximately 140
members) of property owners adjacent to its Brunswick, Georgia, plant. The
class members seek property impairment related damages including damages for
alleged decrease in property values caused by the presence of toxaphene (a
pesticide manufactured at the plant from 1948 to 1980) on their properties.
The class members claim that the toxaphene resulted from manufacturing
operations. The Company intends to vigorously defend this lawsuit.
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.
10
<PAGE> 11
OTHER FINANCIAL INFORMATION
OPERATIONAL HIGHLIGHTS
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1996 1995 1996 1995
-------- ------- ------- --------
<S> <C> <C> <C> <C>
NET SALES BY INDUSTRY SEGMENT
Chemical Specialties . . . . . . . . . . . . . . . . $ 280 $ 286 $ 807 $ 874
Food & Functional Products . . . . . . . . . . . . . 237 260 707 804
Aerospace . . . . . . . . . . . . . . . . . . . . . . 0 0 0 123 *
Corporate and Other . . . . . . . . . . . . . . . . . 1 25 52 77
-------- ------- ------ --------
Total . . . . . . . . . . . . . . . . . . $ 518 $ 571 $1,566 $ 1,878
======== ======= ====== ========
PROFIT (LOSS) FROM OPERATIONS BY INDUSTRY SEGMENT
Chemical Specialties . . . . . . . . . . . . . . . . $ 55 $ 55 $ 153 $ 175
Food & Functional Products . . . . . . . . . . . . . 60 56 169 162
Aerospace . . . . . . . . . . . . . . . . . . . . . . 0 0 0 13 *
Corporate and Other . . . . . . . . . . . . . . . . . 12 (6) 20 (14)
-------- ------- ------- --------
Total . . . . . . . . . . . . . . . . . . $ 127 $ 105 $ 342 $ 336
======== ======= ======= ========
</TABLE>
* Reflects results of operations through March 14, 1995.
11
<PAGE> 12
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 1996 and the nine months ended
September 30, 1996. All comparisons are with the corresponding periods in the
previous year.
The table below reflects the results of operations on both a consolidated
and segment basis, exclusive of divested businesses. The pro forma amounts
exclude the results of operations of the Aerospace segment, divested in March
1995, the Electronics & Printing Division of the Food & Functional Products
segment, divested in December 1995, and the Composite Products Division
reported in Corporate and Other, divested in June 1996. The table is presented
to facilitate the comparison of operating results for purposes of the
Management's Discussion and Analysis. Accordingly, the discussion that follows
speaks to the comparisons in the table.
<TABLE>
<CAPTION>
(Dollars in millions)
(Unaudited)
Three Months Ended September 30, Nine Months ended September 30,
-------------------------------- -------------------------------
Pro Forma Pro Forma Pro Forma
1996 1995 1996 1995
----- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales ................................... $ 518 $ 528 $ 1,517 $ 1,628
Cost of sales ............................... 326 339 966 1,042
Selling, general, and administrative expenses 64 73 191 228
Research and development .................... 14 13 41 40
Other operating expenses, net ............... (13) 5 (15) 13
----- ----- ------- -------
Profit From Operations ...................... 127 98 334 305
Net Sales by Industry Segment
Chemical Specialties ................... $ 280 $ 286 $ 807 $ 874
Food & Functional Products ............. 237 242 707 750
Corporate and Other .................... 1 0 3 4
----- ----- ------- -------
Total ............................. $ 518 $ 528 $ 1,517 $ 1,628
===== ===== ======= =======
Profit From Operations by Industry Segment
Chemical Specialties ................... $ 55 $ 55 $ 153 $ 175
Food & Functional Products ............. 60 51 169 149
Corporate and Other .................... 12 (8) 12 (19)
----- ----- ------- -------
Total ............................. $ 127 $ 98 $ 334 $ 305
===== ===== ======= =======
</TABLE>
Net Sales declined $10 million and $111 million, or 2% and 7%, for the
quarter and nine-month period, respectively, primarily due to lower volumes and
weaker foreign currencies relative to the dollar.
12
<PAGE> 13
Profit from operations increased $29 million for both the quarter and
nine-month period. For the quarter, the increase represents lower selling,
general, and administrative expenses, particularly those associated with the
revisions to employee incentive compensation programs in 1995, lower
depreciation (see Note 3), and favorable variations in other operating expenses.
For the nine-month period, the increase principally represents favorable
variations in other operating expenses. Lower selling, general, and
administrative expenses were offset by lower gross profits resulting from lower
sales revenues. Other operating expenses are discussed in Note 4 to the
financial statements.
Chemical Specialties: Net sales decreased $6 million, or 2%, for the
quarter and $67 million, or 8%, for the nine-month period. Lower volume and
pricing for polypropylene nonwoven fibers, due to increased competition
and lower export sales, primarily account for the
unfavorable change in the quarter and nine-month period. Partially offsetting
these effects in the quarter were favorable volume and pricing in paper
chemicals, while resins volume improvements were partially offset by unfavorable
rates of exchange. Additionally, the nine-month revenues were impacted by
unfavorable resins volume, related to softness in the adhesives market, and
weaker foreign currencies relative to the dollar.
Profit from operations remained flat for the quarter while declining $22
million, or 13%, for the nine-month period. For the quarter and nine-month
period, the effects of lower revenue and higher raw material costs were offset
by manufacturing cost improvements and lower employee incentive compensation
costs.
Food & Functional Products: Net sales decreased $5 million, or 2%, for the
quarter and $43 million, or 6%, for the nine-month period. For the quarter,
unfavorable exchange rates and lower volume in the food gums markets are
partially offset by improved pricing, particularly in Aqualon water-soluble
polymers. Additionally, the nine months reflect lower overall volume in the
construction, oilfield, and food markets, and unfavorable exchange rates,
partially offset by improved pricing in Aqualon.
Profit from operations increased $9 million, or 18%, and $20 million, or
13%, for the quarter and nine months, respectively. Improved pricing,
manufacturing cost improvements, lower employee incentive compensation costs,
along with the aforementioned change in depreciation expense, offset the revenue
decline.
Softness in demand experienced during the nine-month period is
continuing into the fourth quarter. As a result, the trends in overall
operating results are expected to continue at about the year-to-date pace.*
* This paragraph contains forward looking statements and is included here to
provide safe harbor under the Private Securities Litigation Reform Act of
1995.
13
<PAGE> 14
Corporate and Other: Operating profit increased for the quarter and
nine-month period (see Note 4), primarily due to probable recoveries related to
environmental remediation and lower environmental remediation expenses.
Equity in income of affiliated companies improved $1 million and $11
million for the quarter and nine-month period, respectively, reflecting higher
earnings in Tastemaker, the 50% owned flavors joint venture, along with equity
earnings from Hercules' investment in Alliant Techsystems acquired in March 1995
in conjunction with the divestiture of the Aerospace segment.
Interest and debt expense increased for the quarter and nine-month period
principally due to higher average debt outstanding.
Other income (expense), net (see Note 6).
The provision for income taxes for the nine-month period reflects an
estimated annual effective tax rate of 34.4%. The 1995 full-year rate of 34% was
favorably affected by increased utilization of foreign tax credits and a state
income tax settlement related to a prior year sale of an investment.
FINANCIAL CONDITION
Cash flow from operations was $165 million for the nine-month period
compared to $251 million for the corresponding 1995 period, primarily resulting
from higher income tax payments and lower profit from operations. Income tax
payments in the nine-month period were $51 million higher than the corresponding
period in 1995. 1996 payments include $36 million associated with the
divestiture of EPD and $25 million related to the settlement of prior years'
federal income tax audits.
Overall, cash flow benefited by the divestiture of the Composite Products
Division in June 1996 for $135 million in cash, subject to post-closing
adjustments (see Note 10).
Short-term liquidity has remained stable since year-end 1995. Both the
current and quick ratios are relatively flat at 1.0 and 0.5, respectively. At
September 30, 1996, $51 million was available under short-term lines of credit.
14
<PAGE> 15
During the nine-month period, an additional 6,533,321 shares of common
stock were reacquired in the open market. Total debt increased by $118 million
during the nine-month period. As a result, total debt as a percentage of total
capitalization increased from 32% to 41% during the nine-month period and it
is probable that this ratio will increase over time. Funds available under
revolving credit agreements at September 30, 1996 are $30 million; in addition,
$50 million is accessible, depending on market conditions, under a shelf
registration.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1993, Hercules and the U.S. Environmental Protection
Agency 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, 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, which are
expected to be completed in 1997.
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.
Item 4. Submission of Matters to a Vote of Security-Holders.
The Company's Annual Meeting was held on April 25, 1996. Required
information has been supplied in registrant's Form 10-Q for the quarter ended
March 31, 1996.
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, 1996.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hercules Incorporated
by George MacKenzie
------------------------------
George MacKenzie
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and duly authorized signatory)
November 14, 1996
by Vikram Jog
------------------------------
Vikram Jog
Vice President and Controller
(Principal Accounting Officer)
November 14, 1996
17
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