<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 June 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 July 30, 1996, 103,750,147 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 June 30, Six Months Ended June 30,
--------------------------- -----------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES ............................................ $544,936 $614,318 $1,047,506 $1,307,362
Cost of sales ........................................ 353,980 392,243 679,758 854,221
Selling, general, and administrative expenses ........ 65,441 86,907 131,589 180,941
Research and development ............................. 13,689 14,531 27,632 29,773
Other operating expenses (income), net ............... (5,011) 3,175 (6,462) 11,421
-------- -------- ---------- ----------
PROFIT FROM OPERATIONS 116,838 117,462 214,990 231,006
Equity in income of affiliated companies ............. 15,904 12,869 29,844 19,781
Interest and debt expense ............................ 8,928 6,603 16,861 13,694
Other income (expense), net .......................... 8,271 (8,053) 20,109 19,867
-------- -------- ---------- ----------
INCOME BEFORE TAXES .................................. 132,085 115,675 248,082 256,960
Provision for income taxes ........................... 43,870 36,574 83,719 88,465
-------- -------- ---------- ----------
NET INCOME ........................................... $ 88,215 $ 79,101 $ 164,363 $ 168,495
======== ======== ========== ==========
EARNINGS PER SHARE ................................... $ 0.81 $ 0.70 $ 1.51 $ 1.46
======== ======== ========== ==========
DIVIDENDS PER SHARE .................................. $ 0.23 $ 0.21 $ 0.46 $ 0.42
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, December 31,
------------ -------------
1996 1995
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 21,507 $ 72,941
Accounts and notes receivable, net . . . . . . . . . . . 414,066 425,865
Inventories
Finished products . . . . . . . . . . . . . . . . 162,526 167,793
Materials, supplies, and work in process . . . . . 137,380 140,287
Deferred income taxes . . . . . . . . . . . . . . . . . . 59,292 60,247
------------ -----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . 794,771 867,133
Property, plant, and equipment . . . . . . . . . . . . . 2,347,530 2,564,240
Accumulated depreciation and amortization . . . . . . . . 1,486,091 1,564,543
------------ ----------
Net property, plant, and equipment . . . . . . . . 861,439 999,697
Investments . . . . . . . . . . . . . . . . . . . . . . . 351,203 344,273
Other assets . . . . . . . . . . . . . . . . . . . . . . 306,250 282,376
------------ ----------
$ 2,313,663 $2,493,478
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 114,704 $ 117,030
Accrued expenses . . . . . . . . . . . . . . . . . . . . 249,603 312,565
Short-term debt . . . . . . . . . . . . . . . . . . . . . 287,659 206,799
Income taxes payable . . . . . . . . . . . . . . . . . . 57,536 50,327
------------ ----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 709,502 686,721
Long-term debt . . . . . . . . . . . . . . . . . . . . . 272,212 297,855
Deferred income taxes . . . . . . . . . . . . . . . . . . 43,825 94,946
Postretirement benefits and other liabilities . . . . . . 314,227 332,080
STOCKHOLDERS' EQUITY
Common stock (issued: 1996--151,984,360;
1995--151,663,465 shares) . . . . . . . . . . . . 79,159 78,992
Additional paid-in capital . . . . . . . . . . . . . . . 482,217 471,749
Foreign currency translation adjustment . . . . . . . . . 50,577 74,687
Retained earnings . . . . . . . . . . . . . . . . . . . . 1,827,457 1,712,286
---------- ----------
2,439,410 2,337,714
Reacquired stock, at cost (1996--46,694,379;
1995--43,176,841 shares) . . . . . . . . . . . . . . . . 1,465,513 1,255,838
---------- ----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 973,897 1,081,876
---------- ----------
$2,313,663 $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)
Six Months Ended June 30,
------------------------------
1996 1995
---------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . . $ 33,158 $140,064
--------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (47,017) (50,099)
Proceeds of investment and fixed asset disposals . . . . . . . . 147,292 273,506
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,056 15,194
--------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES . . . . . . . . . . . . 103,331 238,601
--------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . 21 570
Long-term debt repayments . . . . . . . . . . . . . . . . . . . . (25,366) (75,556)
Change in short-term debt . . . . . . . . . . . . . . . . . . . . 80,860 (39,724)
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . 7,841 11,574
Common stock reacquired . . . . . . . . . . . . . . . . . . . . . (201,574) (337,731)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (49,192) (47,488)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 15,000
--------- --------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . . (187,410) (393,907)
---------- ---------
Effect of exchange rate changes on cash . . . . . . . . . . . . . (513) 586
---------- --------
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . $ (51,434) $ (14,656)
Cash and cash equivalents - beginning of period . . . . . . . . . 72,941 111,637
--------- ---------
Cash and cash equivalents - end of period . . . . . . . . . . . . $ 21,507 $ 96,981
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) . . . . . . . . . . . . $ 15,145 $ 15,187
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 115,498 42,271
Noncash investing and financing activities:
Conversion of notes and debentures . . . . . . . . . . . . . 298 24,042
Accounts payable for common stock acquisitions . . . . . . . 19,847 7,901
Incentive plan stock issuances . . . . . . . . . . . . . . . 13,672 14,471
Investment in unconsolidated affiliates . . . . . . . . . . 600 143,862
Accounts Receivable from Sale of
Investments/Asset Disposals . . . . . . . . . . . 15,675 -
</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 the average
number of common and common equivalent shares of 108,851,251 for the quarter
ended June 30, 1996; 109,190,354 for the six months ended June 30, 1996;
113,640,022 for the quarter ended June 30, 1995; 115,483,851 for the six months
ended June 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>
JUNE 30,
----------------------
1996 1995
------ ------
<S> <C> <C>
Three months ended . . . . . . . . . . . . . . . . . . . $18 $28
Six months ended . . . . . . . . . . . . . . . . . . . . 39 67
</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 2,742,465 shares in 1996 and 3,503,147
shares in 1995. Net income is further adjusted in the quarter and six-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 $1,067,
respectively, for 1996, and $587 and $1,111, respectively, for the
corresponding periods in 1995.
3. Cost and expenses include depreciation as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1995
------ -----
<S> <C> <C>
Three months ended . . . . . . . . . . . . . . . . . . . $29,546 $31,682
Six months ended . . . . . . . . . . . . . . . . . . . . 60,432 68,814
</TABLE>
4. Other operating expenses (income) for the quarter and six months ended
June 30, 1996 include reductions in the estimated losses on the divestiture of
the Composite Products Division of $3,000 and $5,000, respectively;
additionally, the quarter reflects a favorable settlement of an environmental
remediation claim of $2,300. The quarter and six months ended June 30, 1995,
included environmental cleanup costs, principally for nonoperating sites of
$4,417 and $8,940, respectively, and net employee separation costs and
writeoffs of $2,481 for the six-month period.
5
<PAGE> 6
5. Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1996 1995
--------- ----------
<S> <C> <C>
Three Months Ended:
Costs incurred . . . . . . . . . . . . . . . . . $ 10,553 $ 7,617
Amount capitalized . . . . . . . . . . . . . . . 1,625 1,014
-------- -------
Interest expense . . . . . . . . . . . . . . . . $ 8,928 $ 6,603
======== =======
Six Months Ended:
Costs incurred . . . . . . . . . . . . . . . . . $ 19,577 $15,660
Amount capitalized . . . . . . . . . . . . . . . 2,716 1,966
-------- -------
Interest expense . . . . . . . . . . . . . . . . $ 16,861 $13,694
======== =======
</TABLE>
6. Other income (expense) for the quarter and six months ended June 30,
1996 includes net foreign currency gains of $5,129 and $9,415, respectively,
and gains on sales of real estate of $2,762 and $10,179, respectively. The
six-month period also includes additional gains from post-closing adjustments
to the fourth quarter 1995 sale of the Electronics & Printing Division of
$3,700. In 1995 Other income (expense) for the quarter and six months ended
June 30 included net foreign currency losses of $5,655 and $8,405, respectively
and gains on the sale of real estate of $1,330. Additionally, the six-month
period ended June 30, 1995 included the net gain on the sale of the Aerospace
segment of $31,700.
7. Dividends received from affiliated companies accounted for on the
equity method were as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1996 1995
------- ------
<S> <C> <C>
Three months ended $ 875 $4,485
Six months ended 4,171 6,546
</TABLE>
6
<PAGE> 7
8. A summary of short-term and long-term debt follows:
<TABLE>
<CAPTION>
JUNE 30, December 31,
-------- ------------
1996 1995
-------- ------------
<S> <C> <C>
SHORT-TERM:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . $250,000 $160,000
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,425 46,577
Current maturities . . . . . . . . . . . . . . . . . . . . . . . 234 222
-------- --------
$287,659 $206,799
======== ========
</TABLE>
At June 30, 1996, Hercules had $55,387 of unused lines of credit that may be
drawn as needed. Lines of credit in use or supporting commercial paper at June
30, 1996, were $33,023.
<TABLE>
<S> <C> <C>
LONG-TERM:
Term loans due 1997-2000 $ 99 $ 804
6.5% convertible subordinated debentures due 1999 1,817 1,981
7.85% notes due 2000 25,000 25,000
6.625% notes due 2003 124,870 124,861
8% convertible subordinated debentures due 2010 40,996 41,130
Commercial paper 50,000 50,000
Variable rate loans 22,200 46,600
Other 7,464 7,701
---------- ----------
272,446 298,077
Current maturities of long-term debt (234) (222)
---------- ----------
Net long-term debt $ 272,212 $ 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
June 30, 1996, a total of 50,510,071 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 $33.95 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 quarter and six
months ended June 30, 1996, were $26,259 and $4,210, respectively, and $48,597
and $8,033, respectively. For the quarter and six months ended June 30, 1995,
net sales and operating profit were $26,163 and $2,496, respectively, and
$48,253 and $3,231, respectively.
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
7
<PAGE> 8
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 $78,000 and $260,000. 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 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 $36,000 and $147,000. 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 June 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 February 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.
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
9
<PAGE> 10
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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------------
1996 1995 1996 1995
--------- --------- --------- -------
<S> <C> <C> <C> <C>
NET SALES BY INDUSTRY SEGMENT
Chemical Specialties ........................ $275 $299 $ 527 $ 588
Food & Functional Products .................. 242 287 470 544
Aerospace ................................... - - - 123 *
Corporate and Other ......................... 28 28 51 52
---- ---- ------ ------
Total ................................ $545 $614 $1,048 $1,307
==== ==== ====== ======
PROFIT (LOSS) FROM OPERATIONS BY
INDUSTRY SEGMENT
Chemical Specialties ........................ $ 53 $ 61 $ 98 $ 120
Food & Functional Products .................. 58 59 109 106
Aerospace ................................... - - - 13 *
Corporate and Other ......................... 6 (3) 8 (8)
---- ---- ------ ------
Total ................................ $117 $117 $ 215 $ 231
==== ==== ====== ======
</TABLE>
* Reflects results of operations through March 14, 1995.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Within the following discussion, unless otherwise stated, "quarter"
and "six-month period" refer to the second quarter of 1996 and the six months
ended June 30, 1996. All comparisons are with the corresponding periods in the
previous year.
Net Sales: Chemical businesses (Chemical Specialties and Food &
Functional Products segments) sales declined $69 million and $135 million, or
12%, for the quarter and six-month period, respectively. Lower volume coupled
with weaker foreign currencies relative to the dollar primarily account for the
decline in both the quarter and six-month period. Additionally, revenues were
impacted by the divestiture of the Electronics & Printing Division of the Food
& Functional Products segment (EPD) in December 1995. On a comparable basis
(excluding 1995 EPD sales) Chemical businesses revenues declined $51 million
and $100 million, or 9%, for the quarter and six-month period, respectively.
Consolidated net sales for the six-month period were further impacted by $123
million as a result of the divestiture of the Aerospace segment in March 1995.
Profit from operations in the Chemical businesses declined $9 million
and $19 million, or 8%, for the quarter and six-month period, respectively.
Gross profit declined $29 million and $55 million, or 13%, for the quarter and
six-month period, respectively. The reduction primarily reflects the volume
shortfall noted above, coupled with increased raw material costs, partially
offset by improved pricing, manufacturing cost improvements, and an adjustment
of $3 million related to spare parts inventories. Additionally, the divestiture
of EPD reduced gross profit by $9 million and $18 million for the quarter and
six-month period, respectively. Lower selling, general and administrative
expenses (SG&A), particularly those associated with revisions to employee
incentive compensation programs in 1995 and elimination of costs related to
EPD, favorably impacted operating profit for the quarter and six-month period.
On a consolidated basis, profit from operations remained flat for the
quarter while declining $16 million, or 7%, for the six-month period. The
results reflect the Chemical businesses' performance noted above and the
divestiture of the Aerospace segment offset by favorable changes in Other
operating expenses, net, principally all of which are reported in the Corporate
and Other segment. (See Note 4.) Consolidated gross profit declined $31
million, or 14%, for the quarter and $85 million, or 19%, for the six months.
The quarterly decline relates primarily to the Chemical businesses noted above,
while the six months additionally reflect the loss of profits from the divested
Aerospace segment. SG&A expenses and research and development expenses
declined an aggregate $22 million and $51 million for the quarter and six-month
period, respectively. The reduction primarily reflects lower employee
incentive compensation costs and elimination of costs related to divested
businesses.
12
<PAGE> 13
Other operating expenses (income) reflect a favorable change of $8
million for the quarter and $18 million for the six-month period, primarily due
to lower environmental expenses of $4 million and $9 million for the quarter
and six months, respectively, as no additional remediation costs were
identified during the respective periods. (See Notes 4 and 12.) Additionally,
the six months reflect lower employee separation costs, which had been part of
the ongoing cost reductions within the divested Aerospace segment.
Chemical Specialties: Net sales decreased $24 million, or 8%, for the
quarter and $61 million, or 10%, for the six-month period. Lower volume and
pricing for polypropylene nonwoven fibers, due to increased competition from
lower cost material and lower export sales, primarily account for the
unfavorable change in the quarter and six-month period. The second quarter was
also affected by unfavorable rates of exchange. Additionally, the six-month
period reflects lower Resins volume related to softness in the adhesives
market. Improved pricing in Resins and Paper Technology partially offset the
volume shortfalls.
Profit from operations decreased $8 million, or 13%, for the quarter
and $22 million, or 18%, for the six-month period. The reduction primarily
reflects the polypropylene fibers revenue shortfall noted above, coupled with
raw material price increases, partially offset by manufacturing cost
improvements, and lower employee incentive compensation costs.
Food & Functional Products: Net sales decreased $45 million, or 16%,
for the quarter and $74 million, or 14%, for the six-month period. The sales
decrease related to the divestiture of EPD is $18 million and $35 million for
the quarter and six-month period, respectively. The remaining variance
primarily relates to unfavorable exchange rates in the second quarter, lower
volumes in the construction, oilfield, and food markets, offset by improved
Aqualon pricing.
Reported profit from operations remained relatively flat for the
quarter and six-month period. Excluding the EPD operating profit in 1995,
operating profit increased $3 million and $11 million for the quarter and six
months, respectively. Improved pricing, manufacturing cost improvements, and
lower employee incentive compensation costs offset the volume driven revenue
decline and loss of profits from the divestiture of EPD.
The softness in demand experienced by segments of the chemical
industry during the second half of 1995 continued into 1996. There have been
signs of revenue strengthening toward the end of the second quarter. The
Chemical businesses showed revenue increases over the first quarter and, in
June 1996, for the first time in 1996, Chemical Specialties segment sales
outpaced sales for the corresponding month in 1996. Future results remain
difficult to predict. However, should the favorable trend noted in the second
quarter continue through the remainder of the year, this, coupled with the
ongoing emphasis on cost improvements, should yield overall favorable results
for 1996.*
__________________________________________________
* 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
Equity in income of affiliated companies improved $3 million and $10
million for the quarter and six-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 six-month
period principally due to higher average debt outstanding.
Other income (expense), net (see Note 6) reflects a favorable change
of $16 million for the quarter, while remaining relatively flat for the
six-month period. The change for the quarter principally reflects favorable
exchange and translation effects, which substantially offset the unfavorable
effects of foreign exchange rates on operating profits. Additionally, the
six-month period includes sales of real estate properties and an additional
gain recognized on the divesture of EPD. In 1995, Other income (expense), net
for the six-month period included the net gain on the sale of the Aerospace
segment.
The provision for income taxes for the six-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 $34 million for the six-month period
compared to $140 million for the corresponding 1995 period, primarily resulting
from higher income tax payments and lower Profit From Operations. Income tax
payments in the six-month period were $73 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 1.2 and 0.6, respectively.
At June 30, 1996, $55 million was available under short-term lines of credit.
During the six-month period, an additional 3,888,272 shares of common
stock were reacquired in the open market. As a percentage of total
capitalization, total debt increased from 32% to 37% during the six-month
period. Funds available under revolving credit agreements at June 30, 1996 are
$80 million; in addition, $50 million is accessible, depending on market
conditions, under a shelf registration.
14
<PAGE> 15
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 June 30, 1996.
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)
August 14, 1996
by Vikram Jog
--------------------------------------------
Vikram Jog
Controller
(Principal Accounting Officer)
August 14, 1996
16
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