Wilmington, DE, Feb. 13, 2003 - - Hercules Incorporated (NYSE: HPC) today reported net income for the fourth quarter ended December 31, 2002 of $10 million, or $0.09 per diluted share, which includes after-tax charges of $5 million relating primarily to restructuring.  This compares with breakeven earnings for the same period 2001.

Excluding the above restructuring charges and at the federal statutory tax rate (35%), Hercules’ continuing businesses⁽¹⁾ had earnings of $16 million or $0.15 per diluted share for the fourth quarter of 2002.  Earnings for the fourth quarter 2001, on the same basis and excluding the amortization of goodwill, were breakeven.

Net sales from continuing businesses, for the fourth quarter of 2002 were $423 million, an increase of 6% from the same period last year and a 5% decrease compared to the third quarter 2002.  Compared with the fourth quarter 2001, prices declined 1% while volume/mix had a 5% positive impact and rate of exchange had a 2% positive impact.

For the continuing businesses, 2002 total annual net sales increased 2.5% and operating profit increased 85% compared with 2001.  "I am proud of our employees and the 2002 results in what continues to be a very challenging environment," said Dr. William H. Joyce, Chairman and Chief Executive Officer.  "We made significant progress supporting our customers, lowering our fixed cost structure and improving the overall financial health of the Company.  We remained focused on bringing value to our customers, increasing our competitive advantage, and delivering significant financial improvement by upgrading operations, primarily through Work Process Redesign."

Dr. Joyce added, "During the fourth quarter, we implemented an additional $30 million of run rate cost savings.  This brings our annual run rate savings for the continuing businesses since we began Work Process Redesign to approximately $160 million versus the 2000 baseline – exceeding our goal.  The cost savings improvements are reaching the bottom line as evidenced by the significant improvement in margins.  In 2002, the EBIT⁽¹⁾ margin was 13.5% and EBITDA⁽¹⁾ margin was 18.8%, which represented 570 basis point and 540 basis point improvements from 2001, respectively."

Interest and debt expense and preferred securities distributions were $32 million in the fourth quarter 2002, a decrease of $24 million compared to the fourth quarter 2001, due to lower outstanding debt balances resulting from asset sales.

As announced on December 20, 2002, the Company successfully completed the refinancing of its existing $200 million senior secured revolving credit facility with a new senior secured credit facility consisting of a four-year $125 million revolving credit facility and a 4½-year $200 million term loan.  A portion of the proceeds from this financing will be used to satisfy the Company’s obligations under the $125 million principal amount of the 6.625% senior notes due June 1, 2003.

Capital spending in the fourth quarter was $19 million, bringing 2002 capital spending to $43 million.  Cash outflows for restructuring in the fourth quarter were $11 million, bringing 2002 restructuring cash outflows to $39 million.  The Company also made a $20 million cash contribution to non-U.S. pension plans in the fourth quarter 2002.

The Company recorded a non-cash, after-tax charge of $354 million to Other Comprehensive Income in the fourth quarter 2002 resulting from the underfunded status of the U.S. and foreign pension plans at year-end.  This charge resulted in a negative net worth of $123 million, but does not impact cash flow, earnings or debt covenants.

Fourth quarter 2002 net sales from continuing operations compared to the same period in 2001 increased in all regions except Latin America: up 4% in North America; 11% in Europe; 13% in Asia Pacific; and down 7% in Latin America.

During the fourth quarter, the Company continued to experience an increase in the number of newly filed asbestos claims, with the vast majority of these claims resulting from the filing of a small number of "consolidated" complaints, each of which names large numbers of plaintiffs and defendants, but which provides little information connecting any specific plaintiff's alleged injuries to any specific defendant's products or premises.  It is our expectation that the majority of these newly filed claims will be dismissed without payment, but with plaintiffs retaining the right to re-file should they be able to establish exposure to an asbestos-containing product for which the Company bears liability.  As we indicated previously, in conjunction with outside advisors, we are studying our asbestos-related exposures, insurance recovery expectations, and reserves on an on-going basis and will make adjustments as appropriate.  We believe that we may be in a better position to further refine our analysis of our potential future liability for these exposures prior to the filing of our Form 10K for the year 2002, as more trend data is available on claims, and as our studies progress.

Full Year 2002 Overview⁽¹⁾

Excluding divested businesses, net sales in 2002 were $1.705 billion, an increase of 2.5% from 2001.

On a reported basis, 2002 net earnings were a loss of $5.65 per diluted share compared to a 2001 net loss of $0.54 per diluted share.  Excluding special charges and at the federal statutory tax rate, pro forma 2002 net earnings were $0.63 per diluted share compared to a 2001 net earnings of $0.04 per diluted share.

On April 29, 2002, the Company completed the sale of its BetzDearborn water treatment business to GE Specialty Materials, a unit of General Electric Company.  The paper process chemicals business, approximately one-third of the business originally acquired with BetzDearborn Inc. in 1998, was fully integrated into and remains with the Pulp and Paper Division.  The sale price was $1.8 billion in cash, with net after-tax proceeds of approximately $1.7 billion.  The proceeds of the divestiture were used to reduce debt.

Segment Results⁽¹⁾

In the Performance Products segment, (Pulp and Paper, Aqualon), net sales in the fourth quarter grew 5% while profit from operations improved 70% versus the same quarter last year.  Net sales were down 5% and profit from operations declined 11% compared to the third quarter 2002.

In the Pulp and Paper Division, net sales grew 6% compared to the fourth quarter last year and decreased 1% compared to the third quarter 2002.  Profit from operations improved 63% compared to the same period last year and decreased 4% compared to the third quarter 2002.  The sales growth and improvements in profit from operations, versus the comparable period in 2001, were driven by cost reduction and higher volumes partially offset by lower pricing.

Aqualon’s net sales increased 2% compared to the fourth quarter 2001 and declined 9% from the third quarter 2002.  Profit from operations improved 76% compared to the same period last year and declined 17% compared to the third quarter 2002.  The increase in profit from operations compared to the fourth quarter 2001 resulted from lower costs and rate of exchange benefits offset in part by lower prices in some product areas.

In the Engineered Materials and Additives segment (FiberVisions and Pinova), net sales in the quarter increased 14% compared to the fourth quarter 2001.  Profit from operations moved from a loss of $2 million in the fourth quarter of 2001 to $3 million in profit in the fourth quarter 2002.  Fourth quarter net sales declined 5% and profit from operations decreased 63% compared to the third quarter 2002.

Fourth quarter 2002 net sales for FiberVisions increased 12% and profit from operations increased 200% compared to the same period last year.  Compared to the third quarter 2002, net sales declined 2% and profit from operations was flat.  Profit from operations improved over the fourth quarter 2002 due to higher volume/mix, lower costs and favorable rate of exchange.

Pinova’s net sales increased 22% compared to the same period last year and declined 12% versus the third quarter 2002.  Profit from operations increased approximately $3 million compared to the same period last year and decreased roughly $5 million compared to the third quarter of 2002.  Profit from operations improved over the same period last year primarily through cost reductions.

Outlook

"We anticipate further growth in EBIT and EBITDA in 2003 although we see little or no evidence that aggregate market conditions are improving," said Dr. Joyce.  "Even though the external environment remains weak, the strength of our businesses and the execution in Work Process Redesign and cost reduction should continue to drive our operating results.  Our execution and performance in 2002 confirms our confidence that we will deliver higher profits from continuing businesses in 2003.

"Challenges in 2003 include higher post-retirement and insurance costs and uncertain market conditions.  In addition, we are forecasting a book tax rate of 38% in 2003 reflecting the absence of special one-time charges.  Driving our improvements in earnings in 2003 will be the fully annualized cost savings implemented in 2002 and further reductions in fixed and variable costs, as well as improved sales volumes."

Capital expenditures are estimated to be between $55 and $60 million for 2003.

The Company will maintain its practice of not providing quarterly earnings guidance.

Fourth Quarter Conference Call

The Company will hold a teleconference for shareholders and analysts on February 13th beginning at 9 AM EST.  To participate in the conference call, dial 973-582-2757, 10 to 15 minutes prior to the call.

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⁽¹⁾The continuing businesses include Pulp and Paper, Aqualon, FiberVisions and Pinova.  Unaudited pro forma profit from operations and EBITDA (earnings before interest, taxes, depreciation, and amortization) exclude special items, divested businesses, and goodwill amortization and includes the pro forma effects of the General Electric Specialty Materials "GESM" distribution agreement, which became effective on April 29, 2002.  For purposes of the segment result discussion, the pro forma presentation for 2001 has also been adjusted to exclude the amortization of goodwill consistent with the application of Statement of Financial Accounting Standards No. 142 (SFAS 142), which was adopted effective January 1, 2002.