-----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, OSXmyt6p8FYsUlX4ZquK4RNhnah6/fpwQSn8HBSDQlA/YsVEnpMTUB6JzoZmk8ZW DcWP7zwQrDxwZNmpFuBBTg== 0000893220-96-001378.txt : 19960816 0000893220-96-001378.hdr.sgml : 19960816 ACCESSION NUMBER: 0000893220-96-001378 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERCULES INC CENTRAL INDEX KEY: 0000046989 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] 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: 96614539 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 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. 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 June 30, Six Months Ended June 30, --------------------------- ----------------------------- 1996 1995 1996 1995 -------- -------- ---------- ---------- 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 ======== ======== ========== ==========
See accompanying notes to financial statements. 2 3 HERCULES INCORPORATED CONSOLIDATED BALANCE SHEET (Dollars in thousands)
(UNAUDITED) JUNE 30, December 31, ------------ ------------- 1996 1995 ------------ ------------- 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 ========== ==========
See accompanying notes to financial statements. 3 4 HERCULES INCORPORATED CONSOLIDATED STATEMENT OF CASH FLOW (Dollars in thousands)
(UNAUDITED) Six Months Ended June 30, ------------------------------ 1996 1995 ---------- -------- 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 -
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 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:
JUNE 30, ---------------------- 1996 1995 ------ ------ Three months ended . . . . . . . . . . . . . . . . . . . $18 $28 Six months ended . . . . . . . . . . . . . . . . . . . . 39 67
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:
JUNE 30, ---------------------- 1996 1995 ------ ----- Three months ended . . . . . . . . . . . . . . . . . . . $29,546 $31,682 Six months ended . . . . . . . . . . . . . . . . . . . . 60,432 68,814
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 6 5. Interest and debt costs are summarized as follows:
JUNE 30, -------------------------------- 1996 1995 --------- ---------- 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 ======== =======
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:
JUNE 30, ------------------------------ 1996 1995 ------- ------ Three months ended $ 875 $4,485 Six months ended 4,171 6,546
6 7 8. A summary of short-term and long-term debt follows:
JUNE 30, December 31, -------- ------------ 1996 1995 -------- ------------ SHORT-TERM: Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . $250,000 $160,000 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,425 46,577 Current maturities . . . . . . . . . . . . . . . . . . . . . . . 234 222 -------- -------- $287,659 $206,799 ======== ========
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. 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 ========== ==========
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 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 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 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 11 OTHER FINANCIAL INFORMATION OPERATIONAL HIGHLIGHTS (Dollars in millions)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------------- 1996 1995 1996 1995 --------- --------- --------- ------- 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 ==== ==== ====== ======
* Reflects results of operations through March 14, 1995. 11 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1996 JUN-30-1996 21,507 0 414,066 0 299,906 794,771 2,347,530 1,486,091 2,313,663 709,502 0 0 0 79,159 894,738 2,313,663 1,047,506 1,047,506 679,758 832,516 0 0 16,861 248,082 83,719 164,363 0 0 0 164,363 1.51 0
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