-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DJcRqzHFg+IM8vG+ek7Wbfi/7wHQftxxrQIBXp+KVuegr+iGFhpDQLYKAV8w3fQg PZSu42VYa4N1XnNn+pRXew== 0000893220-95-000763.txt : 19951119 0000893220-95-000763.hdr.sgml : 19951119 ACCESSION NUMBER: 0000893220-95-000763 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES INC CENTRAL INDEX KEY: 0000046989 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 510023450 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00496 FILM NUMBER: 95592823 BUSINESS ADDRESS: STREET 1: 1313 N MARKET ST STREET 2: HERCULES PLZ CITY: WILMINGTON STATE: DE ZIP: 19894 BUSINESS PHONE: 3025945000 MAIL ADDRESS: STREET 1: HERCULES PLAZA ROOM 6471 NE CITY: WILMINGTON STATE: DE ZIP: 19894 FORMER COMPANY: FORMER CONFORMED NAME: HERCULES POWDER CO DATE OF NAME CHANGE: 19680321 10-Q 1 FORM 10-Q HERCULES INCORPORATED 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. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. HERCULES INCORPORATED CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share)
(Unaudited) Three Months Ended Sept. 30 Nine Months Ended Sept. 30 1995 1994 1995 1994 ---- ---- ---- ---- 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 ======== ======== ========== ==========
See accompanying notes to financial statements. 2 3 HERCULES INCORPORATED CONSOLIDATED BALANCE SHEET (Dollars in thousands)
(Unaudited) SEPTEMBER 30 December 31 1995 1994 ---------- ------------ 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 ========== ==========
See accompanying notes to financial statements. 3 4 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOW (Dollars in thousands)
(Unaudited) Nine Months Ended Sept. 30 1995 1994 ---- ---- 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 --
See accompanying notes to financial statements. 4 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:
September 30 1995 1994 -------- -------- Three months ended . . . . . . . . . . . . . $ 26 $ 90 Nine months ended . . . . . . . . . . . . . 93 202
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:
September 30 1995 1994 -------- -------- Three months ended . . . . . . . . . . . . . $ 31,930 $ 36,515 Nine months ended . . . . . . . . . . . . . 100,744 111,838
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 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:
September 30 1995 1994 -------- ------ 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 ======= =======
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 7 7. Dividends received from affiliated companies accounted for on the equity method were as follows:
September 30 1995 1994 -------- -------- Three months ended . . . . . . . . . . . . . . . . . . . $ 5,771 $ 1,829 Nine months ended . . . . . . . . . . . . . . . . . . . 12,317 10,356
8. A summary of short-term and long-term debt follows:
September 30 December 31 1995 1994 -------- -------- SHORT-TERM: Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . $183,000 $100,000 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,739 35,600 Current maturities . . . . . . . . . . . . . . . . . . . . . . . 50,215 52,747 -------- -------- $274,954 $188,347 ======== ========
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.
LONG-TERM: 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 ======== ========
(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. 7 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 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 10 OTHER FINANCIAL INFORMATION OPERATIONAL HIGHLIGHTS (Dollars in millions)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30 1995 1994 1995 1994 ---- ---- ---- ---- 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 ====== ===== ====== =======
* 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 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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 Hercules Incorporated 3Q95 10Q Exhibit 27-Financial Data Schedule 1000 9-MOS DEC-31-1995 SEP-30-1995 82,606 0 445,827 0 361,364 959,870 2,571,788 1,561,710 2,573,137 721,658 0 78,949 0 0 1,024,664 2,573,137 1,877,611 1,877,611 1,220,877 1,541,444 0 0 20,945 377,161 128,355 248,806 0 0 0 248,806 2.18 0
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