-----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, WikLw/okZxQDG2BeW3fY7D39SMJTNazIcIhddcRmcWoq+/YsKuFdSyLWmiCl20OT Nmy9nxrOot21UPDPIASEBw== 0000893220-96-000811.txt : 19960517 0000893220-96-000811.hdr.sgml : 19960517 ACCESSION NUMBER: 0000893220-96-000811 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 96565576 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 STREET 2: RM 8151 NW CITY: WILMINGTON STATE: DE ZIP: 19894-0001 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 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 April 30, 1996, 107,070,040 shares of registrant's common stock were outstanding. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONSOLIDATED STATEMENT OF INCOME (Dollars in thousands, except per share)
(UNAUDITED) THREE MONTHS ENDED MARCH 31, ----------------------------------- 1996 1995 ---------- ----------- NET SALES . . . . . . . . . . . . . . . . . . . . . . . . $502,570 $693,044 Cost of sales . . . . . . . . . . . . . . . . . . . . . . 325,778 461,978 Selling, general, and administrative expenses . . . . . . 66,148 94,034 Research and development . . . . . . . . . . . . . . . . 13,943 15,242 Other operating expenses (income), net . . . . . . . . . (1,451) 8,246 ----------- ---------- PROFIT FROM OPERATIONS . . . . . . . . . . . . . . . . . 98,152 113,544 Equity in income of affiliated companies . . . . . . . . 13,940 6,912 Interest and debt expense . . . . . . . . . . . . . . . . 7,933 7,091 Other income, net . . . . . . . . . . . . . . . . . . . . 11,838 27,920 ---------- ---------- INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . 115,997 141,285 Provision for income taxes . . . . . . . . . . . . . . . 39,849 51,891 ---------- ---------- NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 76,148 $ 89,394 ========== ========== EARNINGS PER SHARE . . . . . . . . . . . . . . . . . . . $ 0.70 $ 0.76 ========== ========== DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.21 ========== ==========
See accompanying notes to financial statements. 2 3 CONSOLIDATED BALANCE SHEET (Dollars in thousands)
(UNAUDITED) MARCH 31 DECEMBER 31 -------------- -------------- 1996 1995 -------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . $ 48,656 $ 72,941 Accounts and notes receivable, net . . . . . . . . . . . 427,916 425,865 Inventories Finished products . . . . . . . . . . . . . . . . 185,457 167,793 Materials, supplies, and work in process . . . . . 149,593 140,287 Deferred income taxes . . . . . . . . . . . . . . . . . . 60,403 60,247 ---------- ---------- TOTAL CURRENT ASSETS . . . . . . . . . . . . . 872,025 867,133 Property, plant, and equipment . . . . . . . . . . . . . 2,550,368 2,564,240 Accumulated depreciation and amortization . . . . . . . . 1,578,860 1,564,543 ---------- ---------- Net property, plant, and equipment . . . . . . . . 971,508 999,697 Investments . . . . . . . . . . . . . . . . . . . . . . . 341,209 344,273 Other assets . . . . . . . . . . . . . . . . . . . . . . 296,093 282,375 ---------- ---------- $2,480,835 $2,493,478 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable . . . . . . . . . . . . . . . . . . . . $ 113,672 $ 117,030 Accrued expenses . . . . . . . . . . . . . . . . . . . . 265,100 312,565 Short-term debt . . . . . . . . . . . . . . . . . . . . . 330,378 206,799 Income taxes payable . . . . . . . . . . . . . . . . . . 40,036 50,327 ---------- ---------- TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 749,186 686,721 Long-term debt . . . . . . . . . . . . . . . . . . . . . 290,148 297,855 Deferred income taxes . . . . . . . . . . . . . . . . . . 97,090 94,946 Postretirement benefits and other liabilities . . . . . . 319,480 332,080 STOCKHOLDERS' EQUITY Common stock (issued 1996--151,934,575; 1995--151,663,465 shares) . . . . . . . . . . . . 79,133 78,992 Additional paid-in capital . . . . . . . . . . . . . . . 480,993 471,749 Foreign currency translation adjustment . . . . . . . . . 61,336 74,687 Retained earnings . . . . . . . . . . . . . . . . . . . . 1,763,888 1,712,286 ---------- ---------- 2,385,350 2,337,714 Reacquired stock, at cost (1996--44,879,617; 1995--43,176,841 shares) . . . . . . . . . . . . . . . . 1,360,419 1,255,838 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 1,024,931 1,081,876 ---------- ---------- $2,480,835 $2,493,478 ========== ==========
See accompanying notes to financial statements. 3 4 CONSOLIDATED STATEMENT OF CASH FLOW (Dollars in thousands)
(Unaudited) THREE MONTHS ENDED MARCH 31, ----------------------------------- 1996 1995 ---------- -------- NET CASH PROVIDED BY (USED IN) OPERATIONS . . . . . . . . . . . . $ (6,091) $105,153 ---------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (20,804) (24,992) Proceeds of investment and fixed asset disposals . . . . . . . . 8,228 252,939 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,009 14,724 ---------- ------- Net Cash Provided by (Used in) Investing Activities . . . . . . . (1,567) 242,671 ---------- ------- CASH FLOW FROM FINANCING ACTIVITIES: Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . 16 135 Long-term debt repayments . . . . . . . . . . . . . . . . . . . . (7,516) (76,319) Change in short-term debt . . . . . . . . . . . . . . . . . . . . 123,580 (90,721) Common stock issued . . . . . . . . . . . . . . . . . . . . . . . 4,865 6,428 Common stock reacquired . . . . . . . . . . . . . . . . . . . . . (112,816) (140,502) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 30,000 Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (24,546) (24,014) ---------- --------- Net Cash Used in Financing Activities . . . . . . . . . . . . . . (16,417) (294,993) ---------- --------- Effect of exchange rate changes on cash . . . . . . . . . . . . . (210) (270) ---------- --------- Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . (24,285) 52,561 Cash and cash equivalents - beginning of period . . . . . . . . . 72,941 111,637 ---------- --------- Cash and cash equivalents - end of period . . . . . . . . . . . . $ 48,656 $164,198 ========== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: . . . . . . . Cash paid during the period for: . . . . . . . . . . . . . . . . Interest (net of amount capitalized) . . . . . . . . . . . . $ 6,505 $ 6,406 Income taxes . . . . . . . . . . . . . . . . . . . . . . . 46,842 11,941 Noncash investing and financing activities: . . . . . . . . . . . Conversion of notes and debentures . . . . . . . . . . . . . 207 19,526 Accounts payable for common stock acquisitions . . . . . . . -- 97,091 Incentive plan stock issuances . . . . . . . . . . . . . . . 7,178 5,362 Investment in unconsolidated affiliates . . . . . . . . . . 600 143,862
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 1995. 2. Primary earnings per share are calculated on the basis of average number of common and common equivalent shares of 109,583,935 at March 31, 1996 and 117,378,844 at March 31, 1995. Earnings have been adjusted to reflect the elimination of interest expense, net of taxes, on the 6.5% convertible debentures, of $21 for the quarter ended March 31, 1996, and $39 for the quarter ended March 31, 1995. Fully diluted earnings per share, which additionally assume conversion of the 8% convertible subordinated debentures, are not materially different from primary earnings per share. In the fully diluted computation, the number of shares is increased by 2,745,711 in 1996 and 3,943,567 in 1995. Earnings are further adjusted in both 1996 and 1995 to reflect the elimination of interest expense on the 8% debentures (net of taxes) in the amount of $556 and $563, respectively. 3. Cost and expenses include depreciation of $30,886 and $37,132 for the quarters ended March 31, 1996 and 1995, respectively. 4. Other operating expenses (income), for the quarter ended March 31, 1996 includes a $2,000 reduction in the estimated losses on the pending divestiture of the Composite Products Division. In 1995, other operating expenses included environmental cleanup costs, principally for nonoperating sites of $4,523 and net employee separation costs and writeoffs of $3,723. 5. Interest and debt costs are summarized as follows:
MARCH 31, -------------------------- 1996 1995 ------ ------ Three Months Ended: Costs incurred . . . . . . . . . . . $8,847 $8,044 Amount capitalized . . . . . . . . . 914 953 ------ ------ Interest expense . . . . . . . . . . $7,933 $7,091 ====== ======
6. Other income, net for the quarter ended March 31, 1996 primarily reflects the gain on the sale of real estate of $7,417 and additional gains from post-closing adjustments to the fourth quarter 1995 sale of the Electronics & Printing Division of $3,700. In 1995, other income, net 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 $3,296 and $2,061 during the quarters ended March 31, 1996 and 1995, respectively. 5 6 8. A summary of short-term and long-term debt follows:
MARCH 31, DECEMBER 31, ------------ ------------ 1996 1995 ------------ ------------ SHORT-TERM: Commercial paper . . . . . . . . . . . . . . . . . . . . . . . $285,000 $160,000 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,151 46,577 Current maturities . . . . . . . . . . . . . . . . . . . . . . 227 222 -------- -------- $330,378 $206,799 ======== ========
At March 31, 1996, Hercules had $44,382 of unused lines of credit that may be drawn as needed. Lines of credit in use at March 31, 1996, were $41,868. LONG-TERM: Term loans due 1997-2000 . . . . . . . . . . . . . . . . . . . $ 127 $ 804 6.5% convertible subordinated debentures due 1999 . . . . . . . 1,829 1,981 7.85% notes due 2000 . . . . . . . . . . . . . . . . . . . . . 25,000 25,000 6.625% notes due 2003 . . . . . . . . . . . . . . . . . . . . . 124,866 124,861 8% convertible subordinated debentures due 2010 . . . . . . . . 41,075 41,130 Commercial paper . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 Variable rate loans . . . . . . . . . . . . . . . . . . . . . . 39,900 46,600 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,578 7,701 --------- --------- 290,375 298,077 Current maturities of long-term debt (227) (222) --------- --------- Net long-term debt $ 290,148 $ 297,855 ========= =========
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 March 31, 1996, a total of 48,575,652 shares of common stock (including 5,075,652 shares for employee benefit programs) had been purchased in the open market at an average price of $33.06 per share. 10. In April 1996, the Company executed a definitive agreement to divest its Composite Products Division. According to the provisions of this agreement, Hercules will receive approximately $135 million in cash, subject to post-closing adjustments. The transaction is expected to be completed by the end of the second quarter of 1996. Net sales and operating profit for this division, which are reported as part of the Corporate and other segment, were $22,338 and $3,823, respectively, for the quarter ended March 31, 1996 and $22,090 and $735, respectively, for the quarter ended March 31, 1995. 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 at March 31, 1996. 6 7 12. (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 $87,000 and $272,000. 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. 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 $39,000 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. 7 8 At March 31, 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 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. 8 9 OTHER FINANCIAL INFORMATION Operational Highlights (Dollars in millions)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1996 1995 ----- ----- NET SALES BY INDUSTRY SEGMENT - ----------------------------- Chemical Specialties . . . . . . . . . . . . . . . $252 $289 Food & Functional Products . . . . . . . . . . . . 228 257 Aerospace . . . . . . . . . . . . . . . . . . . . 0 123* Corporate and other . . . . . . . . . . . . . . . 23 24 ---- ---- TOTAL . . . . . . . . . . . . . . . . . . . $503 $693 ==== ==== PROFIT (LOSS) FROM OPERATIONS BY INDUSTRY SEGMENT - ------------------------------------------------- Chemical Specialties . . . . . . . . . . . . . . . $ 45 $ 59 Food & Functional Products . . . . . . . . . . . . 51 47 Aerospace . . . . . . . . . . . . . . . . . . . . . 0 13* Corporate and other . . . . . . . . . . . . . . . . 2 (5) ---- ---- TOTAL . . . . . . . . . . . . . . . . . . . $ 98 $114 ==== ====
* Reflects results of operations through March 14, 1995. 9 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS All comparisons within the following discussion are with the corresponding periods in the previous year, unless otherwise stated. Chemical businesses (Chemical Specialties and Food & Functional Products segments) sales declined $66 million, or 12% for the quarter, primarily due to lower volume. Softness in demand experienced by segments of the chemical industry during the second half of 1995, continued into early 1996, reducing overall volume. Additionally, revenues were lower due to the divestiture of the Electronics & Printing Division (EPD) in December 1995. On a comparable basis (excluding first quarter 1995 EPD sales) revenues declined $48 million, or 9% for the Chemical businesses. Consolidated net sales declined 27% as a result of the divestiture of the Aerospace segment in March 1995, the aforementioned volume decline and EPD divestiture. Profit from operations in the Chemical businesses declined $10 million, or 9%. The reduction primarily reflects the volume shortfall noted above partially offset by improved pricing and manufacturing cost improvements. Consequently, gross profit margins on a comparable basis (excluding the divested EPD business) remained at approximately 35% for the Chemical businesses. Additionally, lower selling, general, and administrative expenses, particularly those associated with revisions to employee incentive compensation programs in 1995, favorably impacted operating profit. Consolidated profit from operations decreased $16 million or 14%. Consolidated gross profit declined $55 million, primarily as a result of the aforementioned Aerospace and EPD divestitures and the volume driven revenue shortfall. Selling, general, and administrative (SG&A) expenses and research and development expenses declined $29 million. The reduction reflects the elimination of approximately $17 million of costs related to the divested businesses. The remaining decline primarily reflects lower employee incentive compensation costs, resulting from 1995 revisions to the long-term incentive compensation programs. Other operating expense (income) reflects a favorable change of $10 million due to lower environmental expense as no new sites requiring environmental expenditures were identified, lower employee separation costs, which had been part of the ongoing cost reductions within the divested Aerospace segment, and a reduction in estimated losses related to the pending divestiture of the Composite Products Division. Chemical Specialties: Net sales declined $37 million or 13%. Lower volume for polypropylene nonwoven fibers and weakness in the adhesives markets for resins primarily account for the sales shortfall. Additionally, sales were negatively affected by lower finished product prices in fibers due to increased competition. Paper technology volumes were also lower than prior year due to continued softness in the paper industry. Volume 10 11 shortfalls in paper and resins were partially offset by improved pricing. Profit from operations decreased $14 million, or 24%. In addition to the revenue decline, profit from operations was further affected by higher polypropylene raw material costs, offset by cost improvements and improved pricing in Paper Technology and Resins. Additionally, lower employee incentive compensation costs favorably impacted operating profit. Food & Functional Products: Net sales declined $29 million or 11%. More than half the decline in sales relates to the divestiture of EPD in December 1995. The remaining variance relates to reduced volume. On a comparable basis (excluding the effect of EPD sales in 1995) sales declined $11 million or 5% as the aforementioned volume decline was partially offset by improved pricing, particularly for Aqualon. Operating profit increased $4 million ($8 million, excluding the affect of EPD operating profit in 1995). Despite the volume reduction, improved pricing and manufacturing cost improvements resulted in gross margin improvements. Additionally, lower employee incentive compensation costs favorably impacted operating profit. The softness in demand experienced by segments of the chemical industry during the second half of 1995 continued into 1996. Improving conditions, coupled with continued emphasis on cost improvements, should yield overall favorable results for 1996.* Corporate and other: Net sales remained flat and primarily reflect the results of the Composite Products Division. Operating profit improved $7 million and primarily reflects improved operating performance in Composite Products, reduction in estimated losses on the pending divestiture of the Composite Products Division, along with lower environmental expenses. Equity in income of affiliated companies increased approximately $7 million and reflects higher earnings in Tastemaker, the 50% owned flavors joint venture, along with Hercules' investment in Alliant Techsystems acquired in March 1995 in conjunction with the divestiture of the Aerospace segment. Interest and debt costs increased 12% on higher average debt outstanding. Other income net, (see Note 6) decreased $16 million, and primarily reflects the net gain on the sale of the Aerospace segment in 1995, partially offset by first quarter 1996 sales of real estate properties and additional gain recognized on the divestiture of EPD. - -------------------- * This paragraph contains forward looking statements and is included here to provide safe harbor under the Private Securities Litigation Reform Act of 1995. 11 12 The provision for income taxes for the first quarter reflects an estimated annual effective tax rate of 34.9%. 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 In April 1996 Hercules executed a definitive agreement to divest its Composite Products Division. According to provisions of the Agreement, Hercules will receive approximately $135 million in cash, subject to post-closing adjustments. The transaction is expected to be completed by the end of the second quarter. See note 10. Cash used in operations was $6 million for the first quarter of 1996, compared to $105 million provided in 1995. Lower net income, increased working capital requirements coupled with higher tax payments primarily account for the decline. First quarter income tax payments include a $36 million payment associated with the divesture of EPD. 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 March 31, 1996, $44 million is available under short-term lines of credit. During the first quarter of 1996, 1,953,853 shares of common stock were reacquired in the open market. As a percentage of total capitalization, total debt increased from 32% to 38%. Funds available under revolving credit agreements at March 31, 1996 are $45 million; in addition, $50 million is accessible, depending upon market conditions, under a shelf registration. 12 13 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 1996. 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. A SUMMARY OF THE FINAL RESULTS OF VOTING ON THE RESOLUTIONS PROPOSED TO SHAREHOLDERS AT THE ANNUAL MEETING HELD APRIL 25, 1996, IS AS FOLLOWS: 1. Election of Directors Of the 108,506,457 shares entitled to vote, a total of 92,344,826 shares, voted FOR R. Keith Elliott, as a director; 92,318,807 shares, voted FOR Thomas L. Gossage; and 92,339,447 shares, voted FOR Gaynor N. Kelley. A total of 647,013 shares, WITHHELD votes for R. Keith Elliott; 673,032 shares, WITHHELD votes for Thomas L. Gossage; 652,392 shares, WITHHELD votes for Gaynor N. Kelley. Directors continuing in office after the meeting are: Richard M. Fairbanks, III, Edith E. Holiday, H. Eugene McBrayer, Lee M. Thomas, Robert G. Jahn, Ralph L. MacDonald, Jr., and Paula A. Sneed. 2. Ratification of Coopers & Lybrand L. L. P. as Auditors The proposal received the required favorable majority vote necessary FOR approval. Of the shares voting on this proposal, 92,564,333 were FOR; 218,338 were AGAINST; and 209,168 ABSTAINED. 13 14 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 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 March 31, 1996. 14 15 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) May 14, 1996 by Vikram Jog ------------------------------------ Vikram Jog Controller (Principal Accounting Officer) May 14, 1996 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 Hercules Incorporated 1Q96 10-Q 1,000 3-MOS DEC-31-1996 MAR-31-1996 48,656 0 427,916 0 335,050 872,026 2,550,368 1,578,860 2,480,835 749,186 0 0 0 79,133 945,798 2,480,835 502,570 502,570 325,778 404,418 0 0 7,933 115,997 39,849 76,148 0 0 0 76,148 .70 0
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