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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, 1994 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, 1994, 39,167,973 SHARES OF REGISTRANT'S
COMMON STOCK WERE OUTSTANDING.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HERCULES INCORPORTED
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share)
(Unaudited)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
1994 1993 1994 1993
---- ---- ---- ----
NET SALES . . . . . . . . . . . . . . . . . . . . . $680,955 $676,020 $2,066,958 $2,058,694
Cost of sales . . . . . . . . . . . . . . . . . . . 465,554 480,623 1,432,362 1,468,523
Selling, general and administrative expenses . . . 88,740 84,552 270,666 265,932
Research and development . . . . . . . . . . . . . 14,859 19,858 48,466 55,527
Other operating expenses, net . . . . . . . . . . . 5,958 7,081 30,871 50,792
-------- -------- ---------- ----------
PROFIT FROM OPERATIONS . . . . . . . . . . . . . . 105,844 83,906 284,593 217,920
Equity in income of affiliated companies . . . . . 6,645 5,472 20,846 17,844
Interest and debt expense . . . . . . . . . . . . . 6,847 8,536 21,362 28,047
Other income (expense), net . . . . . . . . . . . . (5,777) (1,879) (9,152) 30,228
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES . . . . 99,865 78,963 274,925 237,945
Provision for income taxes . . . . . . . . . . . . 33,836 27,446 91,908 87,809
-------- -------- ---------- ----------
INCOME BEFORE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES . . . . . . . . . . . . . 66,029 51,517 183,017 150,136
Effect of changes in accounting principles . . . . -- -- -- (238,218)
-------- -------- ---------- ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . $ 66,029 $ 51,517 $ 183,017 $ (88,082)
======== ======== ========== ==========
EARNINGS (LOSS) PER SHARE:
Before effect of changes in accounting principles . $ 1.65 $ 1.21 $ 4.55 $ 3.48
Effect of changes in accounting principles . . . . -- -- -- (5.52)
-------- -------- ---------- ----------
Earnings (Loss) Per Share . . . . . . . . . . . . . $ 1.65 $ 1.21 $ 4.55 $ ( 2.04)
======== ======== ========== ==========
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . $ .56 $ .56 $ 1.68 $ 1.68
======== ======== ========== ==========
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
SEPTEMBER 30 December 31
1994 1993
---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . $ 80,115 $ 154,628
Accounts and notes receivable . . . . . . . . . . . 610,981 575,924
Inventories
Finished products . . . . . . . . . . . . . 177,479 199,053
Materials, supplies, and work in process . . 214,308 213,313
Deferred income taxes . . . . . . . . . . . . . . . 83,605 83,605
---------- ----------
TOTAL CURRENT ASSETS . . . . . . . . . 1,166,488 1,226,523
Property, plant and equipment . . . . . . . . . . . 3,114,879 3,270,296
Accumulated depreciation and amortization . . . . . 1,888,315 1,960,961
---------- ----------
Net property, plant and equipment . . . . . 1,226,564 1,309,335
Investments . . . . . . . . . . . . . . . . . . . . 220,412 232,077
Other assets . . . . . . . . . . . . . . . . . . . 359,329 394,026
---------- ----------
$2,972,793 $3,161,961
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses . . . . . . . $ 586,115 $ 633,771
Short-term debt . . . . . . . . . . . . . . . . . . 180,621 163,901
Income taxes payable . . . . . . . . . . . . . . . 42,967 86,539
---------- ----------
TOTAL CURRENT LIABILITIES . . . . . . . . . 809,703 884,211
Long-term debt . . . . . . . . . . . . . . . . . . 323,422 316,871
Deferred income taxes . . . . . . . . . . . . . . . 115,789 126,203
Postretirement benefits and other liabilities . . . 458,457 466,469
STOCKHOLDERS' EQUITY
Common stock (issued 1994, 60,680,997;
1993, 59,899,295 shares) . . . . . . . . . . 31,605 31,198
Additional paid-in capital . . . . . . . . . . . . 476,180 453,553
Foreign currency translation adjustment . . . . . . 56,912 29,593
Retained earnings . . . . . . . . . . . . . . . . . 2,070,906 1,955,005
---------- ----------
2,635,603 2,469,349
Reacquired stock, at cost (1994, 21,447,075;
1993, 19,062,295 shares) . . . . . . . . . . 1,370,181 1,101,142
---------- ----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . 1,265,422 1,368,207
---------- ----------
$2,972,793 $3,161,961
========== ==========
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(Dollars in thousands)
(Unaudited)
Nine Months Ended Sept.30
1994 1993
---- ----
NET CASH PROVIDED BY OPERATIONS . . . . . . . . . . $ 152,426 $ 296,302
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . (110,299) (102,966)
Proceeds of investment and fixed asset disposals . 180,026 60,560
Cash received from (invested in) unconsolidated
affiliates . . . . . . . . . . . . . . . . . . . 1,939 (5,485)
Other, net . . . . . . . . . . . . . . . . . . . (327) (9,141)
--------- ---------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES . 71,339 (57,032)
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term borrowings . . . . . . . . . . . . . . . 41,088 194,327
Long-term debt repayments . . . . . . . . . . . . . (136,167) (197,588)
Change in short-term debt . . . . . . . . . . . . . 145,936 39,144
Common stock issued . . . . . . . . . . . . . . . 8,221 11,704
Common stock reacquired . . . . . . . . . . . . . . (289,544) (189,859)
Dividends paid . . . . . . . . . . . . . . . . . . (67,118) (71,674)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . (297,584) (213,946)
Effect of exchange rate changes on cash . . . . . . (694) (696)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (74,513) 24,628
Cash and cash equivalents - beginning of period . . 154,628 53,552
--------- ---------
Cash and cash equivalents - end of period . . . . . $ 80,115 $ 78,180
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) . . . . $ 17,774 $ 28,741
Income taxes . . . . . . . . . . . . . . . 151,044 77,163
Noncash investing and financing activities:
Conversion of notes and debentures . . . . . 30,875 17,317
Accounts payable for common stock acquisitions 10,781 7,021
Incentive plan stock issuances . . . . . . . 28,168 21,241
See accompanying notes to financial statements.
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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 1993.
2. In 1994, equity in income of affiliated companies is reported before
applicable income taxes and included in income before income taxes and effect
of changes in accounting principles. Through December 31, 1993, equity in
income of affiliated companies was reported net of applicable income taxes and
included after tax in income before effect of changes in accounting principles.
Management believes that the current presentation is more meaningful. The
effect on income before income taxes is $6,645 and $20,846 for the third
quarter and nine months ended September 30, 1994 respectively, and $5,472 and
$17,844 for comparable 1993 periods. The effect on provision for income taxes
is $2,512 and $6,982 for the third quarter and nine months ended September 30,
1994 respectively, and $1,586 and $5,394 for comparable 1993 periods. 1993
has been adjusted to conform with current reporting.
3. Primary earnings per share are calculated on the basis of average
number of common and common equivalent shares of 39,652,678 for the quarter
ended September 30, 1994; 40,180,420 for the nine months ended September 30,
1994; 42,698,055 for the quarter ended September 30, 1993; and 43,172,246 for
the nine months ended September 30, 1993. 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
1994 1993
-------- --------
Three months ended . . . . . . . . . . . . . $ 90 $ 61
Nine months ended . . . . . . . . . . . . . 202 167
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 1,508,689 for the quarter ended September 30, 1994;
1,680,733 for the nine months ended September 30, 1994; 2,212,389 for the
quarter ended September 30, 1993; and 2,316,326 for the nine months ended
September 30, 1993. Net income is further adjusted in the quarter and
nine-month periods for both 1994 and 1993 to reflect the elimination of
interest expense on the 8% debentures (net of taxes) in the amount of $1,034
and $3,089, respectively for 1994, and $1,242 and $4,023, respectively for the
corresponding periods in 1993.
4. Cost and expenses include depreciation and amortization as follows:
September 30
1994 1993
-------- --------
Three months ended . . . . . . . . . . . . . $ 36,515 $ 40,397
Nine months ended . . . . . . . . . . . . . 111,838 124,206
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5. Other operating expenses, net for the quarter and nine months ended
September 30, 1994, include environmental cleanup costs, principally for
nonoperating sites, of $4,095 and $14,699, respectively, and principally
employee separation charges of $1,863 and $16,172, for the respective periods.
The quarter and nine months ended September 30, 1993, include environmental
cleanup costs for nonoperating sites of $4,056 and $14,673, respectively, and
restructuring charges and writeoffs of $3,025 and $36,119, for the respective
periods, encompassing a $25,000 first quarter 1993 restructuring charge related
to the Liquid Molding Resins (LMR) business, severence costs and asset
write-offs.
6. Interest and debt costs are summarized as follows:
September 30
1994 1993
-------- --------
Three Months Ended:
Costs incurred . . . . . . . . . . . . $ 9,018 $ 9,962
Amount capitalized . . . . . . . . . . 2,171 1,426
------- -------
Interest expense . . . . . . . . . . . $ 6,847 $ 8,536
======= =======
Nine Months Ended:
Costs incurred . . . . . . . . . . . . $26,897 $31,878
Amount capitalized . . . . . . . . . . 5,535 3,831
------- -------
Interest expense . . . . . . . . . . . $21,362 $28,047
======= =======
7. Other income (expense), net for the quarter ended September 30, 1994,
includes lower shut down 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 includes a gain from the sale of an
investment.
The nine months ended September 30, 1993, includes a gain on the sale
of an affiliated company of $15,505, gains from litigation settlements
substantially relating to businesses acquired in the 1980's of $29,036, and
charges related to settlement of disputes resulting from the sale of a
substantial portion of the Aircraft and Electronics business of $8,800.
8. Dividends received from affiliated companies accounted for on the
equity method were as follows:
September 30
1994 1993
-------- --------
Three months ended . . . . . . . . . . . . . $ 1,829 $ 3,544
Nine months ended . . . . . . . . . . . . . 10,356 17,873
9. Accounts receivable include amounts under long-term contracts and
subcontracts (principally with the U.S. Government or U.S. Government
contractors) of $188,598 at September 30, 1994, and $196,465 at December 31,
1993, net of progress payments of $397,148 and $373,132, respectively.
Included in these amounts are unbilled accounts receivable (work in progress
and claims) of $115,063 and $113,282, respectively, representing recoverable
costs and accrued profits which will be billed in accordance with contract
terms and delivery schedules. Receivables which will not be collected within
one year are $44,805 at September 30, 1994, and $15,144 at December 31, 1993.
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Long-term U.S. Government contracts and subcontracts are subject to
termination by the government; however, in these circumstances an equitable
settlement of work performed is negotiated unless in the unlikely event it is
determined to be a termination for default. Additionally, certain contracts
are subject to renegotiation. At September 30, 1994 and December 31, 1993,
there were no significant receivables subject to litigation.
10. A summary of short-term and long-term debt follows:
September 30 December 31
1994 1993
-------- --------
SHORT-TERM:
Commercial paper . . . . . . . . . . . . . . . . . $151,525 $ --
Banks . . . . . . . . . . . . . . . . . . . 26,019 29,566
Current maturities . . . . . . . . . . . . . . . . 3,077 134,335
-------- --------
$180,621 $163,901
======== ========
At September 30, 1994, Hercules had $71,858 of unused lines of credit that may
be drawn as needed. Lines of credit in use or supporting commercial paper at
September 30, 1994, were $23,971.
LONG-TERM:
6.625% notes due 2003 . . . . . . . . . . . . . . $124,837 $124,823
6.5% convertible subordinated debentures due 1999 . 4,386 5,568
8% convertible subordinated debentures due 2010 . . 67,066 96,759
7.85% notes due 2000 . . . . . . . . . . . . . . . 25,000 25,000
8.5% debentures due 2017 (a) . . . . . . . . . . . -- 79,144
9.6% notes due 1994 . . . . . . . . . . . . . . . . -- 50,000
Term loans due 1994-1995 . . . . . . . . . . . . . 53,290 52,166
Variable rate loans (b) . . . . . . . . . . . . . . 36,100 --
Other . . . . . . . . . . . . . . . . . . . 15,820 17,746
-------- --------
326,499 451,216
Current maturities of long-term debt . . . . . . . (3,077) (134,335)
-------- --------
Net long-term debt . . . . . . . . . . . . . . . . $323,422 $316,871
======== ========
(a) Debentures were redeemed in first quarter 1994.
(b) Uncollateralized bank borrowings with average maturities of 400 days, with
interest at a negotiated spread over lenders' cost of funds.
11. Since 1991, the Board of Directors has authorized the repurchase of up to
15,950,000 shares of company common stock, 1,450,000 shares of which is
intended to satisfy requirements of various employee benefit programs. Through
September 30, 1994, a total of 11,245,200 shares of common stock (including
950,000 shares for employee benefit programs) had been purchased in the open
market at an average price of $77.20 per share.
12. Commitments and Contingencies
(a) Environmental
Hercules has been identified as a potentially responsible (PRP) by
Federal and State authorities for environmental cleanup at numerous sites. The
estimated range of the
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reasonably possible costs of remediation is between $69,000 and $226,000. 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 EPA or other Government agency or through
correspondence with previously named PRP's 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.
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. The Court
has not entered its ruling on the liability of Uniroyal Chemical Ltd. and
Standard Chlorine of Delaware. Appeal of the Court's ruling with respect to
the finding of Hercules being jointly and severably liable will be filed
promptly after issuance of a final court order. Appeals of the Court's
expected rulings with respect to Uniroyal and Standard Chlorine of Delaware 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 has appealed the Court's order finding the Department of
Defense not liable. Oral argument on this appeal has been scheduled for
November 1994. A decision on this matter may be received in early 1995.
Hercules' potential costs for remediation of the Jacksonville site are
presently estimated between $28,000 and $136,000. Hercules' potential costs
are based on its assessment of potential liability, the level of participation
by other PRP's 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
determined and approved by the U.S. Environmental Protection Agency (EPA).
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 a resource for
identification of environmental issues at Hercules plant sites. In addition to
on-site coordinators, Hercules has an environmental audit program which is
designed to identify environmental issues at operating plant sites and is used
to supplement the identification of environmental issues by the environmental
coordinators. Through efforts of these programs and through other plant and
corporate personnel, Hercules identifies potential environmental, regulatory
and remedial issues.
At September 30, 1994, the accrued liability for environmental
remediation represents management's best estimate of the probable and
reasonably estimable costs related to environmental remediation. The
measurement of the liability is evaluated
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quarterly based on currently available information, including the progress of
remedial investigation at each site and the current state of negotiations with
regulatory authorities regarding the method and extent of apportionment of
costs among other PRP's. 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
incidential 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 is also 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 adverse effect upon the consolidated
financial position of Hercules, although quarterly or annual operating results
could be materially affected.
13. On April 7, 1994, Hercules completed the divestiture of its Packaging
Films unit for $161,000 in cash, subject to post-closing adjustments. The
effect of the divestiture on the results of operations is not significant. Net
sales of this unit were $0 and $41,000 for the third quarter ended September
30, 1994 and September 30, 1993, respectively, and $47,000 and $124,000 for
the nine-month period, respectively. Operating profits were $0 and $1,000 for
the third quarter ended September 30, 1994 and September 30, 1993,
respectively, and $1,000 and $6,000 for the nine-month period, respectively.
14. Pending Divestiture
In July 1994, the Company announced its intent to divest a substantial
portion of the Aerospace segment and a letter of intent was signed in regards
to the sale. In October 1994, the Company announced it had reached a
definitive agreement with Alliant Techsystems for that company to acquire a
substantial portion of the Aerospace segment.
Net sales and operating profits for the business units to be divested for
the three months ended September 30, 1994 were $146,601 and $17,993,
respectively, and $161,685 and $16,515 for the three months ended
September 30, 1993, respectively. Net sales and operating profits for the
business units for the nine months ended September 30, 1994 were $447,929 and
$44,908, respectively, and $477,724 and $46,516 for the nine months ended
September 30, 1993, respectively.
15. Investments in Debt and Equity Securities
The Company's investments in equity and debt securities covered under the
scope of Statement of Financial Accounting Standards (SFAS), No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" of
approximately $70 million (cost approximates market) are classified as
"available for sale".
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OTHER FINANCIAL INFORMATION
OPERATIONAL HIGHLIGHTS
(Dollars in millions)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
1994 1993 1994 1993
---- ---- ---- ----
NET SALES BY INDUSTRY SEGMENT
Chemical Specialties . . . . . . . . . . . . . . . $271 $240 $ 798 $ 734
Food & Functional Products . . . . . . . . . . . . 243 215 709 665
Aerospace . . . . . . . . . . . . . . . . . . . . . 165 178 509 525
Corporate and Other . . . . . . . . . . . . . . . . 1 43 50 135
---- ---- ------ ------
Total . . . . . . . . . . . . . . . . . $681 $676 $2,067 $2,059
==== ==== ====== ======
PROFIT (LOSS) FROM OPERATIONS BY INDUSTRY SEGMENT
Chemical Specialties . . . . . . . . . . . . . . . $ 53 $ 41 $ 149 $ 119
Food & Functional Products . . . . . . . . . . . . 43 30 116 96
Aerospace . . . . . . . . . . . . . . . . . . . . . 15 15 37 42
Corporate and Other . . . . . . . . . . . . . . . . (5) (2) (18) (39)(a)
Total . . . . . . . . . . . . . . . . . $106 $ 84 $ 285 $ 218
==== ==== ====== ======
(a) Includes a $25 charge for restructuring during the first quarter of
1993.
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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 "nine-month period" refer to the third quarter of 1994 and the nine months
ended September 30, 1994. All comparisons are with the corresponding periods
in the previous year.
Consolidated net sales for the quarter and nine-month period were
relatively flat. An increase in sales from the Chemical segments of 13% for
the quarter and 8% for the nine-month period were offset by the loss of sales
from the Packaging Films unit, which was divested in the second quarter, and
reduced Aerospace revenues.
Gross profit was up approximately $20 million and $44 million for the
quarter and the nine-month period, respectively, despite the flat sales.
Margins have risen to 31% from 29% a year ago primarily on the strength of the
Chemical segments. Selling, general and administrative expenses and research
and development expenses were relatively flat in aggregate. The lower research
and development expenses associated with Aerospace and other divested business
were offset by costs associated with stock- based incentives.
Profit from operations increased by $22 million and $67 million for
the quarter and nine-month period, respectively, principally because of the
higher gross margins discussed above. The comparative results for the
nine-month period are additionally affected by a $25 million restructuring
charge taken in the first quarter of 1993.
In October 1994, Hercules and Alliant Techsystems (Alliant) signed a
definitive agreement under which Alliant will acquire a substantial portion of
the Aerospace segment for $300 million in cash and 3.86 million shares of newly
issued Alliant common stock, resulting in Hercules having approximately a 30%
ownership position in Alliant. Included in the transaction are Aerospace units
whose reported combined revenues and operating profits were $660 million and
$105 million, respectively in 1993. The two companies have also agreed that
Hercules will hold two of the eight nonemployee seats on the Alliant Board of
Directors. The transaction is subject to Government review and approval as
well as approval by Alliant shareholders. Closing is projected to take place
during the first quarter of 1995. Previously in July 1994, Hercules had
announced the signing of a letter of intent with Alliant for purchase by that
company of a substantial portion of the Aerospace segment. Additionally, the
Company announced that it had completed its previously announced divestiture of
its Liquid Molding Resins business unit.
Chemical Specialties sales increased 13% for the quarter and 9% for
the nine-month period. Higher resins pricing for wood rosins in adhesives,
chewing gum and construction markets, and hydrocarbon resins in adhesives and
graphics arts markets coupled with overall volume increases account for the
sales improvement.
In addition, strong nonwoven volume in the diaper coverstock market
and increased volume for rosin size and emulsion products due to higher
utilization rates
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in the paper industry added to the sales increase for both the quarter and
nine-month period.
Operating profit increased 29% and 25%, respectively, for the quarter
and nine-month period due primarily to the increased sales volume.
Additionally, lower raw material and reduced manufacturing costs added to the
operating profit improvement.
Food and Functional Products sales increased 14% and 7% for the
quarter and nine-month period, respectively. Water soluble polymers sales
increased reflecting price improvements due to strong demand in the paint,
construction and regulated markets. This improvement was partially offset by
lower volumes in the oil and gas markets along with declines in coatings due to
continued pricing pressures from foreign manufacturers on furniture coating
applications. Additionally volume improvement in food gums and printing
product applications added to the revenue improvement.
Profit from operations improved 43% and 21% for the quarter and
nine-month period and reflects the aforementioned favorable price and volume
improvements coupled with improved manufacturing costs.
Aerospace sales declined by $13 million and $16 million for the
quarter and nine-month period, respectively, primarily as a result of overall
defense budget cuts, reduced number of new programs, program cancellations and
funding delays. Profit from operations remained flat for the quarter while
declining $5 million for the nine-month period. The quarter and nine-month
period results have been benefited from an $8 million one-time license of
technology related to demilitarization and laser proximity sensor technologies.
Additionally, the quarter and nine-month comparative results are negatively
impacted by lower incentive and award fees in 1994.
Corporate and Other sales declined for the quarter and nine-month
period primarily due to the divestiture of the Packaging Films business on
April 7, 1994. While net sales have declined, operating losses have also
declined for the nine-month period principally reflecting restructuring charges
taken in 1993.
Equity in income of affiliated companies (see Note 2) increased $1.2
million and $3 million for the quarter and nine-month period, respectively,
principally due to higher Tastemaker earnings.
Interest and debt costs incurred declined $1.7 million and $6.7
million for the quarter and nine-month period, respectively, due to reduced
levels of average debt during the periods and decreases in interest rates.
Other income (expense) net (see Note 7) showed an unfavorable change
of $4 million for the quarter and $39 million for the nine-month period. The
nine-month period for 1993 reflects favorable litigation settlements and gain
on the sale of an equity investment aggregating $45 million. Whereas 1994
includes a $4 million gain on the sale of an investment.
The 1994 provision for income taxes for the nine-month period
reflects an
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estimated annual effective tax rate of 33.6%, combined with a relatively low
rate on the sale of an investment. Both the 1994 estimated rate and the 1993
full-year rate of 34% are lower than the federal statutory rate. The 1994 rate
has been favorably affected by reduced foreign taxes, while the 1993 rate was
affected by a research and experimentation tax credit of $10 million and also
by a relatively high tax rate on the sale of Hercules' investment in a foreign
affiliate.
FINANCIAL CONDITION
Cash flow from operations was $152 million for the nine-month period
compared to $296 million for the corresponding 1993 period. The variation is
primarily attributable to the cash implications of nonrecurring items. In 1993
there was nonrecurring cash inflow from a litigation settlement and the Titan
contract restructuring. In 1994 there was a nonrecurring tax payment
associated with the Titan settlement late last year and the sale of the
Packaging Films business. Also in 1994 there have been higher working capital
requirements.
Overall cash flow benefited from the proceeds associated with the sale
of Packaging Films business of $169 million.
Short-term liquidity has remained stable since year-end 1993. Both
the current ratio and the quick ratio are relatively flat at 1.4 and 0.8,
respectively. At September 30, 1994, $72 million is available under short-term
lines of credit.
During the nine-month period, an additional 2,534,900 shares of common
stock were reacquired in the open market. As a percentage of total
capitalization, total debt increased from 26% to 28%, during the nine-month
period, principally as a result of increased debt. It is not management's
intent to have this ratio exceed 33%. Funds available under revolving credit
agreements at September 30, 1994 exceed $228 million; in addition, $50 million
is accessible, depending upon market conditions, under a shelf registration.
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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 which, when effectuated, will settle the 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, MA facility. Hercules has signed a Consent Decree
(the "Decree") based on this agreement requiring supplemental
environmental projects (at a cost of approximately $350,000),
compliance with permit limits in the future, and $250,000 in
fines. Hercules expects the Decree to be finalized in the
first quarter of 1995.
On February 17, 1994, Hercules received an Administrative
Order and Notice of Civil Administrative Penalty Assessment
(the "Order") for alleged violations of Hercules' water
discharge (NPDES) permit at its Kenvil, New Jersey facility.
The fine identified in the Order is $141,750. Although
Hercules has requested an administrative hearing on this
matter, negotiations with the State of New Jersey Department
of Environmental Protection ("NJDEP") are ongoing. Hercules
expects that the ultimate penalty amount to be paid to NJDEP
under the terms of the Order will exceed $100,000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None
(b) Reports on Form 8-K.
Hercules was not required to file any reports on Form 8-K
for the quarter ended September 30, 1994.
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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 R. Keith Elliott
----------------------------
R. Keith Elliott
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer
and duly authorized signatory)
November 14, 1994
by T. A. Ciconte
-----------------------------
T. A. Ciconte
Vice President and Controller
(Principal Accounting Officer)
November 14, 1994
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