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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 JUNE 30, 1995 COMMISSION FILE NUMBER 1-496
------------- -----
HERCULES INCORPORATED
A DELAWARE CORPORATION
I.R.S. EMPLOYER IDENTIFICATION NO. 51-0023450
HERCULES PLAZA
WILMINGTON, DELAWARE 19894
TELEPHONE: 302-594-5000
REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
AS OF JULY 30, 1995, 111,516,560 SHARES OF REGISTRANT'S COMMON
STOCK WERE OUTSTANDING.
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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
1995 1994 1995 1994
---- ---- ---- ----
NET SALES . . . . . . . . . . . . . . . . . . . . . $614,318 $705,975 $1,307,362 $1,386,003
Cost of sales . . . . . . . . . . . . . . . . . . . 392,243 490,354 854,221 966,808
Selling, general and administrative expenses . . . 86,907 88,332 180,941 181,926
Research and development . . . . . . . . . . . . . 14,531 17,629 29,773 33,607
Other operating expenses, net . . . . . . . . . . . 3,175 9,402 11,421 24,913
----------- ----------- ------------ -------------
PROFIT FROM OPERATIONS . . . . . . . . . . . . . . 117,462 100,258 231,006 178,749
Equity in income of affiliated companies . . . . . 12,869 7,834 19,781 14,201
Interest and debt expense . . . . . . . . . . . . . 6,603 7,266 13,694 14,515
Other income (expense), net . . . . . . . . . . . . (8,053) (4,150) 19,867 (3,375)
---------- ------------ ----------- -------------
INCOME BEFORE TAXES . . . . . . . . . . . . . . . . 115,675 96,676 256,960 175,060
Provision for income taxes . . . . . . . . . . . . 36,574 32,030 88,465 58,072
---------- ---------- ----------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . $ 79,101 $ 64,646 $ 168,495 $116,988
========= ========= ========= =========
EARNINGS PER SHARE . . . . . . . . . . . . . . . . $ 0.70 $ 0.54 $ 1.46 $ 0.97
=========== =========== ============ ============
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . $ 0.21 $ 0.19 $ 0.42 $ 0.38
=========== =========== ============ ============
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(UNAUDITED)
JUNE 30 December 31
1995 1994
---------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 96,981 $ 111,637
Accounts and notes receivable . . . . . . . . . . . . . . 467,930 588,851
Inventories
Finished products . . . . . . . . . . . . . . . . 189,915 171,891
Materials, supplies, and work in process . . . . . 177,140 190,363
Deferred income taxes . . . . . . . . . . . . . . . . . . 70,073 89,573
----------- -----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . 1,002,039 1,152,315
Property, plant and equipment . . . . . . . . . . . . . . 2,499,177 3,100,749
Accumulated depreciation and amortization . . . . . . . . 1,517,675 1,884,694
--------- ----------
Net property, plant and equipment . . . . . . . . 981,502 1,216,055
Investments . . . . . . . . . . . . . . . . . . . . . . . 357,951 224,760
Other assets . . . . . . . . . . . . . . . . . . . . . . 291,961 348,123
---------- ----------
$2,633,453 $2,941,253
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 125,668 $ 162,858
Accrued expenses . . . . . . . . . . . . . . . . . . . . 370,133 384,947
Short-term debt . . . . . . . . . . . . . . . . . . . . . 228,072 188,347
Income taxes payable . . . . . . . . . . . . . . . . . . 31,862 31,318
------------ -----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . 755,734 767,470
Long-term debt . . . . . . . . . . . . . . . . . . . . . 208,188 307,217
Deferred income taxes . . . . . . . . . . . . . . . . . . 153,067 129,183
Postretirement benefits and other liabilities . . . . . . 339,119 442,702
STOCKHOLDERS' EQUITY
Common stock (issued 1995, 151,249,582;
1994, 149,115,459 shares) . . . . . . . . . . . . 78,776 77,665
Additional paid-in capital . . . . . . . . . . . . . . . 435,972 394,749
Foreign currency translation adjustment . . . . . . . . . 98,667 49,422
Retained earnings . . . . . . . . . . . . . . . . . . . . 1,595,345 1,474,329
---------- ----------
2,208,760 1,996,165
Reacquired stock, at cost (1995, 39,486,098;
1994, 32,480,067 shares) . . . . . . . . . . . . . 1,031,415 701,484
---------- ------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 1,177,345 1,294,681
---------- -----------
$2,633,453 $2,941,253
========== ==========
See accompanying notes to financial statements.
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HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW
(DOLLARS IN THOUSANDS)
(Unaudited)
Six Months Ended June 30
1995 1994
---- ----
NET CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . $ 140,064 $ 70,536
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,099) (76,536)
Proceeds of investment and fixed asset disposals . . . . . . . . . . . . . . 273,506 166,388
Cash invested in unconsolidated affiliates . . . . . . . . . . . . . . . . . -- 2,395
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,194 (1,075)
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . 238,601 91,172
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 11,911
Long-term debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (75,556) (137,051)
Change in short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 39,724 156,989
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,574 6,841
Common stock reacquired . . . . . . . . . . . . . . . . . . . . . . . . . . . (337,731) (255,992)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,488) (44,565)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 --
-----------------------------
NET CASH USED IN FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . (393,907) (261,867)
----------- -----------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . 586 (512)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . $ (14,656) $(100,671)
Cash and cash equivalents - beginning of period . . . . . . . . . . . . . . . 111,637 154,628
----------- -----------
Cash and cash equivalents - end of period . . . . . . . . . . . . . . . . . . $ 96,981 $ 53,957
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . . . . $ 15,187 $ 17,874
Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,271 91,597
Noncash investing and financing activities:
Conversion of notes and debentures . . . . . . . . . . . . . . . . . . . 24,042 29,752
Accounts payable for common stock acquisitions . . . . . . . . . . . . . 7,901 --
Incentive plan stock issuances . . . . . . . . . . . . . . . . . . . . . 14,471 26,502
Investment in Alliant Techsystems, Inc. . . . . . . . . . . . . . . . . 143,862 --
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 1994.
Pursuant to the divestiture of the Aerospace segment in March 1995,
Composite Materials data is included in segment Other. Previously it was
reported in the Aerospace segment. 1994 information has been restated to
conform with the 1995 presentation.
2. Primary earnings per share are calculated on the basis of the
average number of common and common equivalent shares of 113,640,022 for the
quarter ended June 30, 1995; 115,483,851 for the six months ended June 30,
1995; 120,093,663 for the quarter ended June 30, 1994; and 121,115,100 for the
six months ended June 30, 1994. Net income has been adjusted to reflect the
elimination of interest expense, net of taxes, on the 6 1/2% convertible
debentures in the following amounts:
June 30
1995 1994
---- ----
Three months ended . . . . . . . . . . . . . . . . . . . $28 $ 54
Six months ended . . . . . . . . . . . . . . . . . . . . 67 110
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 3,503,147 shares in 1995 and 5,304,543
shares in 1994. Net income is further adjusted in the quarter and six-month
periods for both 1995 and 1994 to reflect the elimination of interest expense
on the 8% debentures (net of taxes) in the amount of $587 and $1,111,
respectively for 1995, and $889 and $1,949, respectively for the corresponding
periods in 1994.
3. Cost and expenses include depreciation and amortization as follows:
June 30
1995 1994
---- ----
Three months ended . . . . . . . . . . . . . . . . . . . $31,682 $36,140
Six months ended . . . . . . . . . . . . . . . . . . . . 68,814 75,323
4. Other operating expenses, net for the quarter and six months ended
June 30, 1995, include environmental cleanup costs, principally for
nonoperating sites, of $4,417 and $8,940, respectively; additionally, the
six-month period reflects net employee separation costs and writeoffs of
$2,481. The quarter and six months ended June 30, 1994, include environmental
cleanup costs for nonoperating sites of $5,370 and $10,604, respectively, and
net employee separation costs and writeoffs of $4,032 and $14,309, for the
respective periods.
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5. Interest and debt costs are summarized as follows:
June 30
1995 1994
---- ----
Three Months Ended:
Costs incurred . . . . . . . . . . . . . . . . . $ 7,617 $ 9,114
Amount capitalized . . . . . . . . . . . . . . . 1,014 1,848
------- --------
Interest expense . . . . . . . . . . . . . . . . $ 6,603 $ 7,266
======= =======
Six Months Ended:
Costs incurred . . . . . . . . . . . . . . . . . $15,660 $17,879
Amount capitalized . . . . . . . . . . . . . . . 1,966 3,364
------- ---------
Interest expense . . . . . . . . . . . . . . . . $13,694 $14,515
======= =======
6. Other income (expense), net for the quarters ended June 30, 1995 and
1994, include provisions related to exchange and translation gains and losses,
and minority interest. Additionally, the six months ended June 30, 1995,
include the net gain on the divestiture of the Aerospace segment to Alliant
Techsystems, Inc. (Alliant) of $31,700, subject to post-closing adjustments.
Included in the net gain are pension curtailment and settlement losses
aggregating $60,723 and a postretirement benefit curtailment gain of $24,540,
resulting from the transfer of the defined-benefit pension and postretirement
benefit obligations and related defined-benefit plan assets to Alliant. The
divestiture was completed on March 15, 1995. Net sales of this segment were
$162,707 for the quarter ended June 30,1994 and $123,414 and $301,328 for the
six-month periods ended June 30, 1995 and 1994, respectively. Operating profits
were $14,111 for the quarter ended June 30, 1994, and $13,306 and $26,915 for
the six-month period ended June 30, 1995 and 1994, respectively. Hercules now
holds approximately a 27% ownership interest in Alliant accounted for on the
equity method. In 1994, other income net included the gain on the sale of an
investment of $4,461.
7. Dividends received from affiliated companies accounted for on the
equity method were as follows:
June 30
1995 1994
---- ----
Three months ended . . . . . . . . . . . . . . . . . . . $4,485 $ 1,850
Six months ended . . . . . . . . . . . . . . . . . . . . 6,546 8,527
8. A summary of short-term and long-term debt follows:
JUNE 30 December 31
1995 1994
-------- --------
SHORT-TERM:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . $130,000 $100,000
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,863 35,600
Current maturities . . . . . . . . . . . . . . . . . . . . . . . 51,209 52,747
---------- ----------
$228,072 $188,347
========== ==========
At June 30, 1995, Hercules had $64,114 of unused lines of credit that may be
drawn as needed. Lines of credit in use or supporting commercial paper at June
30, 1995, were $32,234.
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LONG-TERM:
Term loans due 1993-1995 . . . . . . . . . . . . . . . . . . . . $ 52,462 $ 52,393
6.5% convertible subordinated debentures due 1999 . . . . . . . . 2,643 4,242
7.85% notes due 2000 . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
6.625% notes due 2003 . . . . . . . . . . . . . . . . . . . . . . 124,852 124,842
8% convertible subordinated debentures due 2010 . . . . . . . . . 44,462 66,905
Variable rate loans (a) . . . . . . . . . . . . . . . . . . . . . -- 75,400
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,978 11,182
---------- ---------
259,397 359,964
Current maturities of long-term debt . . . . . . . . . . . . . . (51,209) (52,747)
---------- ----------
Net long-term debt . . . . . . . . . . . . . . . . . . . . . . . $208,188 $307,217
========= =========
(a) Uncollateralized bank borrowings with average maturities of 400 days,
with interest at a negotiated spread over lenders' cost of funds.
9. Since 1991, the Board of Directors has authorized the repurchase of up
to 47,850,000 shares of company common stock, 4,350,000 shares of which is
intended to satisfy requirements of various employee benefit programs. Through
June 30, 1995, a total of 42,380,199 shares of common stock (including
4,350,000 shares for employee benefit programs) had been purchased in the open
market at an average price of $29.62 per share.
10. 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 $59,000 and $246,000. The actual costs will depend upon numerous
factors, including the number of parties found liable at each environmental
site and their ability to pay, the actual method of remediation, outcome of
negotiations with regulatory authorities, outcome of litigation, changes in
environmental laws and regulations, technological developments, and the years
of remedial activity required, which could range up to 30 years. Hercules
becomes aware of sites in which it may be but has not yet been named a PRP
principally through its knowledge of investigation of sites by the U.S.
Environmental Protection Agency (EPA) or other Government agency or through
correspondence with previously named PRPs requesting information of Hercules'
activities at sites under investigation. Hercules brought suit in late 1992
against its insurance carriers for past and future costs for remediation of
certain environmental sites. Hercules has not included any insurance recovery
in the estimates set forth above.
Hercules has established procedures for identification of
environmental issues at Hercules plant sites. Hercules designates an
environmental coordinator at all operating facilities. Environmental
coordinators are familiar with environmental laws and regulations and are a
resource for identification of environmental issues. Hercules also has an
environmental audit
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program which is designed to identify environmental issues at operating plant
sites. Through these programs, Hercules identifies potential environmental,
regulatory, and remedial issues.
Litigation over liability at Jacksonville, Arkansas, the most
significant site, has been pending since 1980. As a result of a pretrial court
ruling in October 1993, Hercules has been held jointly and severally liable for
costs incurred and for future remediation costs at the Jacksonville site by the
District Court, Eastern District of Arkansas (the Court). Appeal of the
Court's ruling with respect to the finding of Hercules being jointly and
severally liable will be filed promptly after issuance of a final court order.
In mid-November 1993, an advisory jury found Uniroyal Chemical, Ltd., liable
for the Jacksonville site, but also found that Uniroyal had proven a reasonable
basis for allocation of responsibility. That same advisory jury found that
Standard Chlorine of Delaware is not a liable party for the Jacksonville site.
The Court 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 $22,000 and $149,000. Hercules' potential costs
are based on its assessment of potential liability, the level of participation
by other PRPs and upon current estimates of the costs to remediate the
Jacksonville site. The costs to remediate will vary as Records of Decision are
issued on each operable unit of the site and as remediation methods are
approved by the EPA.
At June 30, 1995, the accrued liability for environmental remediation
represents management's best estimate of the probable and reasonably estimable
costs related to environmental remediation. The extent of liability is
evaluated quarterly. The measurement of the liability is evaluated based on
currently available information, including the progress of remedial
investigation at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of
costs among other PRPs. The company does not anticipate that its financial
condition will be materially affected by environmental remediation costs in
excess of amounts accrued, although quarterly or annual operating results could
be materially affected.
(b) Litigation
Hercules is a defendant in numerous lawsuits that arise out of, and
are incidental to, the conduct of its business. In these legal proceedings, no
director, officer, or affiliate is a party or a named defendant. These suits
concern issues such as product liability, contract disputes, labor-related
matters, patent infringement, environmental proceedings and personal injury
matters.
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Hercules also is a defendant in one Federal Administrative Law
Proceeding and two Qui Tam ("Whistle Blower") lawsuits brought by former
employees.
While it is not feasible to predict the outcome of all pending suits
and claims, management does not anticipate that the ultimate resolution of
these matters will have a material effect upon the consolidated financial
position of Hercules, although the resolution of any of the matters during a
specific period could have a material effect on the quarterly or annual
operating results for that period.
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OTHER FINANCIAL INFORMATION
OPERATIONAL HIGHLIGHTS
(Dollars in millions)
Three Months Ended June 30 Six Months Ended June 30
1995 1994 1995 1994
---- ---- ---- ----
NET SALES BY INDUSTRY SEGMENT
Chemical Specialties . . . . . . . . . . . . . $ 299 $ 272 $ 588 $ 527
Food & Functional Products . . . . . . . . . . 287 244 544 466
Aerospace . . . . . . . . . . . . . . . . . . - 162 * 123 ** 301 *
Other . . . . . . . . . . . . . . . . . . . . 28 28 * 52 92 *
------ ------- ------- -------
Total . . . . . . . . . . . . . . . . . $ 614 $ 706 $1,307 $1,386
====== ======= ======= =======
PROFIT (LOSS) FROM OPERATIONS BY
INDUSTRY SEGMENT
Chemical Specialties . . . . . . . . . . . . . $ 61 $ 54 $ 120 $ 97
Food & Functional Products . . . . . . . . . . 59 40 106 73
Aerospace . . . . . . . . . . . . . . . . . . - 14 * 13 ** 27 *
Other . . . . . . . . . . . . . . . . . . . . (3) (8)* (8) (18)*
------ ------- --------- -------
Total . . . . . . . . . . . . . . . . . $ 117 $ 100 $ 231 $ 179
====== ======= ======= =======
* Pursuant to the divestiture of the Aerospace segment in March 1995,
Composite Materials' data is included in segment Other. Previously it was
reported in the Aerospace segment. 1994 information has been restated to
conform with the 1995 presentation.
** Reflects results of operations through March 14, 1995.
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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 "six-month period" refer to the second quarter of 1995 and the six months
ended June 30, 1995. All comparisons are with the corresponding periods in the
previous year.
Chemical businesses (Chemical Specialties and Food & Functional
Products segments) sales increased 14% for the quarter and six-month period.
Favorable rates of exchange and improved pricing coupled with volume increases
primarily account for the sales improvement. On a consolidated basis, however,
net sales declined 13% for the quarter and 6% for the six-month period,
reflecting the divestiture of the Aerospace segment in March 1995 and the
Packaging Films business unit in April 1994.
Profit from operations for the Chemical businesses increased $26
million or 28% for the quarter and $56 million or 33% for the six-month period,
primarily related to higher gross margins. Margins for the Chemical businesses
rose to 36% from 34% for the quarter and six-month period while consolidated
margins rose to 36% for the quarter and six-month period from 30%
for the corresponding 1994 periods. Favorable rates of exchange, improved
pricing and volume increases primarily account for the profit improvement.
Manufacturing cost reduction efforts were partially offset by higher raw
material costs. On a consolidated basis, profit from operations increased $17
million or 17% for the quarter and $52 million or 29% for the six-month period.
These results reflect the Chemical businesses' performance partially offset by
the loss of profits associated with the aforementioned divested businesses.
Selling, general, and administrative expenses remained relatively flat
for the quarter and six-month period as cost reduction initiatives were
partially offset by rates of exchange. Research and development expenses for
the quarter and six-month period declined principally as a result of business
divestitures. Other operating expenses also declined for the quarter and
six-month period, primarily due to lower employee separation costs in 1995.
Year-over-year percentage growth in operating profit in the Chemical
businesses is not expected to continue at the current pace. Increases in
cost of inputs may erode some of the operating profit gains, however,
year-over-year growth is expected to continue in subsequent quarters of 1995.
Chemical Specialties: Net sales increased $27 million or 10% for the
quarter and $61 million or 12% for the six-month period. Profit from
operations increased 13% for the quarter and 24% for the six-month period.
Improved volume for paper technology products and increased pricing for resins
and fibers products in addition to favorable rates of exchange primarily
account for the sales and operating profit improvement.
Food & Functional Products: Net sales increased $43 million or 18%
for the quarter and $78 million or 17% for the six-month period. Favorable
pricing for water soluble polymers utilized in the paint, construction, and
regulated markets, improved pricing in the specialty markets for food gums, and
favorable exchange rates primarily account for the sales increases. Profit
from operations increased 48% for the quarter and 45% for the six-month period
and primarily relates to the aforementioned sales increases coupled with
manufacturing cost improvements.
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Corporate and Other: Net sales for the quarter were flat while
declining $40 million for the six-month period. This decline relates primarily
to the divestiture of the Packaging Films business unit in April 1994.
Operating losses declined $5 million for the quarter and $10 million for the
six-month period and principally reflects improvement in Composite Materials
performance.
Improvement in equity income of affiliated companies, approximately $5
million for the quarter and six-month period, reflects higher earnings in
Tastemaker, the 50% owned flavors joint venture, along with equity earnings
from Hercules' investment in Alliant Techsystems, Inc. acquired in March 1995,
in conjunction with the divestiture of the Aerospace segment.
Interest and debt costs incurred declined for the quarter and
six-month period principally due to lower average debt outstanding.
Other income (expense), net reflects an unfavorable change of $4
million for the quarter and a favorable change of $23 million for the six-month
period. The change for the quarter principally reflects unfavorable exchange
and translation effects. Additionally, the six-month variance reflects the
gain on the sale of the Aerospace segment in March 1995.
The 1995 provision for income taxes for the six-month period reflects
an estimated annual effective tax rate of 35.8%, combined with a relatively
high rate on the sale of the Aerospace segment in the first quarter and a
relatively low rate in the second quarter due to a favorable state income tax
settlement related to the prior year sale of an investment. The 1994 full-year
rate of 33% was favorably affected by a research and experimentation tax credit
of $4 million.
FINANCIAL CONDITION
Cash flow from operations was $140 million for the six-month period
compared to $71 million for the corresponding 1994 period. Improved operating
earnings and lower income tax payments, offset by higher working capital
requirements, resulted in the increase in cash flow. Income tax payments in
the first quarter of 1994 included payments of approximately $45 million
associated with the restructuring of the Titan IV solid rocket motor upgrade
contract in late 1993.
Short-term liquidity has remained stable since year-end 1994. Both
the current ratio and the quick ratio are relatively flat at 1.3 and 0.8,
respectively. At June 30, 1995, $64 million was available under short-term
lines of credit.
During the six-month period, an additional 7,304,799 shares of common
stock were reacquired in the open market. Also, during the quarter a change
was adopted increasing the
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deductible for property insurance to $50 million. This change, which lowers
premium costs, was prompted by the favorable loss experience in the Chemical
businesses and the divestiture of the Aerospace segment. As a percentage of
total capitalization, total debt decreased from 28% to 27% during the
six-month period. It is management's intent to have this ratio increase to
the 30% to 33% range. Funds available under revolving credit agreements
at June 30, 1995, are $250 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 in settlement of EPA's
claims that Hercules violated its wastewater permit with the City of Chicopee
and the federal pretreatment standard for industrial users of publicly owned
treatment works at its Chicopee, Massachusetts, facility. Hercules signed a
Consent Decree (the "Decree"), which was entered by the court on December 15,
1994, based on this agreement requiring supplemental environmental projects (at
a cost of approximately $375,000), compliance with permit limits in the future,
and $250,000 in fines. Hercules has paid the $250,000 fine and is currently in
the process of performing the supplemental environmental projects.
Hercules received a letter from the New Jersey Department of
Environmental Protection (the "Department") dated March 9, 1995, which stated
that the Department was considering an enforcement action against Hercules for
alleged non-compliance with the terms of a 1993 Administrative Consent Order
("ACO") at its Kenvil, New Jersey, facility. The ACO covered alleged
violations of the Air Pollution Control Act. The letter also identified
potential violations under the Spill Compensation and Control Act, the New
Jersey Water Pollution Control Act, and the New Jersey Safe Drinking Water Act.
Hercules has met with the Department and has submitted a schedule addressing
all matters identified in the Department's letter. Although no formal legal
proceeding has been commenced, a civil enforcement action, including a penalty
assessment in excess of $100,000 is expected.
Hercules received a letter from the U.S. Department of Justice ("DoJ")
dated May 3, 1995 in which it was notified of the U.S. Environmental Protection
Agency's request that a complaint be filed against Hercules for violations of
the Clean Air Act and the National Emission Standard for Hazardous Air
Pollutants for Asbestos that allegedly occurred during demolition activities at
its former Covington, Virginia, facility. Hercules has met with DoJ and has
agreed in principle to settle the matter. Hercules is in the process of
negotiating a Consent Decree with DoJ.
Item 4. Submission of Matters to a Vote of Security-Holders.
The Company's Annual Meeting was held on April 27, 1995. Required
information has been supplied in registrant's Form 10-Q for the quarter ended
March 31, 1995.
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 June 30, 1995.
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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
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer
and duly authorized signatory)
August 14, 1995
by V. Jog
-------------------------------------
V. Jog
Controller
(Principal Accounting Officer)
August 14, 1995
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