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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 DECEMBER 31, 1999
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P. O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (606) 815-3333
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 _____
At January 31, 2000, there were 71,030,583 shares of Registrant's
Common Stock outstanding. One Right to purchase one-thousandth of
a share of Series A Participating Cumulative Preferred Stock
accompanies each outstanding share of Registrant's Common Stock.
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PART I - FINANCIAL INFORMATION
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended
December 31
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(In millions except per share data) 1999 1998
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REVENUES
Sales and operating revenues $ 1,897 $ 1,646
Equity income (loss) (200) (40)
Other income 14 27
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1,711 1,633
COSTS AND EXPENSES
Cost of sales and operating expenses 1,537 1,299
Selling, general and administrative expenses 244 267
Depreciation, depletion and amortization 57 51
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1,838 1,617
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OPERATING INCOME (LOSS) (127) 16
Interest expense (net of interest income) (43) (33)
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INCOME (LOSS) BEFORE INCOME TAXES (170) (17)
Income taxes 4 6
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NET INCOME (LOSS) $ (166) $ (11)
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EARNINGS (LOSS) PER SHARE - Note A
Basic $ (2.32) $ (.14)
Diluted $ (2.32) $ (.14)
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31 September 30 December 31
(In millions) 1999 1999 1998
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 46 $ 110 $ 91
Accounts receivable 1,274 1,242 1,109
Allowance for doubtful accounts (24) (23) (21)
Note receivable from Industri Kapital - Note E 285 - -
Inventories - Note A 522 464 471
Deferred income taxes 99 107 96
Other current assets 124 159 107
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2,326 2,059 1,853
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 2,140 2,172 1,958
Investment in Arch Coal 178 417 419
Cost in excess of net assets of companies acquired 503 220 212
Other noncurrent assets 291 264 338
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3,112 3,073 2,927
PROPERTY, PLANT AND EQUIPMENT
Cost 2,902 2,649 2,472
Accumulated depreciation, depletion and amortization (1,390) (1,357) (1,289)
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1,512 1,292 1,183
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$ 6,950 $ 6,424 $ 5,963
========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Debt due within one year $ 544 $ 219 $ 225
Trade and other payables 1,033 1,135 1,051
Income taxes 87 42 120
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1,664 1,396 1,396
NONCURRENT LIABILITIES
Long-term debt (less current portion) 2,198 1,627 1,511
Employee benefit obligations 421 418 454
Deferred income taxes 139 226 7
Reserves of captive insurance companies 179 175 175
Other long-term liabilities and deferred credits 377 382 357
Commitments and contingencies - Note D - - -
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3,314 2,828 2,504
COMMON STOCKHOLDERS' EQUITY 1,972 2,200 2,063
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$ 6,950 $ 6,424 $ 5,963
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
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Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings loss Total
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BALANCE AT OCTOBER 1, 1998 $ 76 $ 602 $ 1,501 $ (42) $ 2,137
Total comprehensive income (loss) (1) (11) (1) (12)
Dividends (20) (20)
Issued common stock under
Stock incentive plans 5 5
Acquisitions of other companies 7 7
Repurchase of common stock (1) (53) (54)
--------- --------- ---------- ---------------- --------
BALANCE AT DECEMBER 31, 1998 $ 75 $ 561 $ 1,470 $ (43) $ 2,063
========= ========= ========== ================ ========
BALANCE AT OCTOBER 1, 1999 $ 72 $ 464 $ 1,710 $ (46) $ 2,200
Total comprehensive income (loss) (1) (166) (6) (172)
Dividends (19) (19)
Issued common stock for
acquisitions of other companies 1 1
Repurchase of common stock (1) (37) (38)
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BALANCE AT DECEMBER 31, 1999 $ 71 $ 428 $ 1,525 $ (52) $ 1,972
========= ========= ========== ================ ========
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(1) Reconciliations of net income (loss) to total comprehensive income (loss) follow.
Three months ended
December 31
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(In millions) 1999 1998
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Net income (loss) $ (166) $ (11)
Unrealized translation adjustments (10) 1
Related tax benefit 4 -
Unrealized gains (losses) on securities - (1)
Related tax benefit - -
Gains on securities included in net income - (2)
Related tax expense - 1
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Total comprehensive income (loss) $ (172) $ (12)
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At December 31, 1999, the accumulated other comprehensive loss was
comprised of net unrealized translation losses of $42 million and a
minimum pension liability of $10 million.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Three months ended
December 31
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(In millions) 1999 1998
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CASH FLOWS FROM OPERATIONS
Net income (loss) $ (166) $ (11)
Expense (income) not affecting cash
Depreciation, depletion and amortization 57 51
Deferred income taxes (38) (37)
Equity loss (income) from affiliates 200 40
Distributions from equity affiliates 70 106
Change in operating assets and liabilities (1) (132) (76)
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(9) 73
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 636 -
Proceeds from issuance of common stock - 3
Repayment of long-term debt (40) (21)
Repurchase of common stock (38) (54)
Increase in short-term debt 296 109
Dividends paid (19) (20)
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835 17
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (65) (48)
Purchase of operations - net of cash acquired (2) (825) (8)
Investment purchases (3) (4) (42)
Investment sales and maturities (3) 1 64
Other - net 3 1
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(890) (33)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (64) 57
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 110 34
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 46 $ 91
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(1) Excludes changes resulting from operations acquired or sold.
(2) Amounts exclude acquisitions through the issuance of common stock of
$1 million in 1999 and $7 million in 1998. The 1999 amount is expected
to be reduced by $285 million in the March 2000 quarter upon the
redemption of the note receivable from Industri Kapital received in
connection with the sale of the non-U.S. construction operations of
Superfos.
(3) Represents primarily investment transactions of captive insurance
companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL REPORTING
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations. Although such
statements are subject to any year-end audit adjustments which may
be necessary, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. These financial statements
should be read in conjunction with Ashland's Annual Report on Form
10-K for the fiscal year ended September 30, 1999. Results of
operations for the quarter ended December 31, 1999, are not
necessarily indicative of results to be expected for the year
ending September 30, 2000.
INVENTORIES
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December 31 September 30 December 31
(In millions) 1999 1999 1998
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Chemicals and plastics $ 394 $ 358 $ 376
Construction materials 73 55 41
Petroleum products 54 45 53
Other products 52 55 48
Supplies 6 5 9
Excess of replacement costs over LIFO carrying values (57) (54) (56)
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$ 522 $ 464 $ 471
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EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share (EPS). No shares are added to the
diluted computation for assumed exercises of stock options, since
their effect is antidilutive in the event of a loss.
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Three months ended
December 31
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(In millions except per share data) 1999 1998
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NUMERATOR
Numerator for basic and diluted EPS - Net income (loss) $ (166) $ (11)
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DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 72 75
Common shares issuable upon exercise of stock options - -
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Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 72 75
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BASIC EARNINGS (LOSS) PER SHARE $ (2.32) $ (.14)
DILUTED EARNINGS (LOSS) PER SHARE $ (2.32) $ (.14)
6
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE B - UNUSUAL ITEMS
During the quarter ended December 31, 1999, Ashland recognized a
charge related to asset impairment and restructuring costs
recorded by 58-percent owned Arch Coal, Inc. The charge is largely
due to the write-down of assets at Arch Coal's Dal-Tex and Hobet
21 mining operations and certain coal reserves in central
Appalachia.
Marathon Ashland Petroleum LLC (MAP) maintains an inventory
valuation reserve to reduce the LIFO cost of its inventories to
their net realizable values. Adjustments in that reserve are
recognized quarterly based on changes in petroleum product prices,
creating non-cash charges or credits to Ashland's earnings. No
adjustments to the reserve were required during the December 1999
quarter.
The following tables show the effects of these unusual items on
Ashland's operating income, net income and diluted earnings per
share for the periods ended December 31, 1999, and 1998.
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Three months ended
December 31
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(In millions except per share data) 1999 1998
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Operating income before unusual items $ 108 $ 109
Arch Coal asset impairment write-down and
restructuring costs (235) -
MAP inventory valuation adjustments - (93)
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Operating income (loss) as reported $ (127) $ 16
============ ============
Net income before unusual items $ 37 $ 46
Arch Coal asset impairment write-down and
restructuring costs (203) -
MAP inventory valuation adjustments - (57)
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Net income (loss) as reported $ (166) $ (11)
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Diluted earnings per share before unusual items $ .52 $ .62
Impact of unusual items (2.84) (.76)
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Diluted earnings (loss) per share as reported $ (2.32) $ (.14)
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7
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - UNCONSOLIDATED AFFILIATES
Ashland is required by Rule 3-09 of Regulation S-X to file
separate financial statements for its two significant
unconsolidated affiliates, Marathon Ashland Petroleum LLC (MAP)
and Arch Coal, Inc. Such financial statements for the year ended
December 31, 1998, were filed on a Form 10-K/A on March 17, 1999.
Financial statements for the year ended December 31, 1999, will be
filed by means of a Form 10-K/A on or before March 30, 2000.
Unaudited income statement information for these companies is
shown below.
MAP is organized as a limited liability company (LLC) that has
elected to be taxed as a partnership. Therefore, the parents are
responsible for income taxes applicable to their share of MAP's
taxable income. The net income reflected below for MAP does not
include any provision for income taxes which will be incurred by
its parents.
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Three months ended
December 31
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(In millions) 1999 1998
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MAP
Sales and operating revenues $ 6,003 $ 4,698
Income (loss) from operations 106 (91)
Net income (loss)
Including inventory valuation adjustments 111 (88)
Excluding inventory valuation adjustments 111 156
Ashland's equity income (loss)
Including inventory valuation adjustments 36 (40)
Excluding inventory valuation adjustments 36 53
Arch Coal
Sales and operating revenues $ 356 $ 394
Income (loss) from operations (374) 14
Net income (loss)
Including asset impairment and restructuring costs (348) -
Excluding asset impairment and restructuring costs (4) -
Ashland's equity income (loss)
Including asset impairment and restructuring costs (237) (1)
Excluding asset impairment and restructuring costs (2) (1)
NOTE D - LITIGATION, CLAIMS AND CONTINGENCIES
Ashland is subject to various federal, state and local
environmental laws and regulations that require remediation
efforts at multiple locations, including current operating
facilities, operating facilities conveyed to MAP, previously owned
or operated facilities, and Superfund or other waste sites. For
information regarding environmental reserves, see the
"Miscellaneous - Environmental Matters" section of Ashland's Form
10-K.
Environmental reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share
of the ultimate costs of required remediation efforts. Such
uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate
cleanup methods, changes in environmental regulations, the
potential effect of continuing improvements in remediation
technology, and the number and financial strength of other
potentially responsible parties at multiparty sites. Reserves are
regularly adjusted as environmental assessments and remediation
efforts proceed.
8
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE D - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
Ashland was a defendant in a series of cases involving more than
600 former workers at the Lockheed aircraft manufacturing facility
in Burbank, California. The plaintiffs alleged personal injuries
resulting from exposure to chemicals sold to Lockheed by Ashland,
and inadequate labeling of such chemicals. The parties have
executed an agreement to fully resolve and settle this matter,
which is subject to approval by the court. Ashland believes the
settlement amount, which is not material to Ashland, will be
covered by insurance.
In addition to these matters, Ashland and its subsidiaries are
parties to numerous other claims and lawsuits, some of which are
for substantial amounts. While these actions are being contested,
the outcome of individual matters is not predictable with
assurance.
Ashland does not believe that any liability resulting from any of
the above matters, after taking into consideration its insurance
coverage and amounts already provided for, will have a material
adverse effect on its consolidated financial position, cash flows
or liquidity. However, such matters could have a material effect
on results of operations in a particular quarter or fiscal year as
they develop or as new issues are identified.
NOTE E - ACQUISITIONS
In October 1999, Ashland completed its tender offer for Superfos
a/s, a Denmark based industrial company. In November 1999, in a
series of transactions, Ashland sold the businesses of Superfos,
other than its U.S. construction operations, to a unit of Industri
Kapital, a European private equity fund. In the November
transactions, Ashland received from Industri Kapital a short-term
note for $285 million, which is expected to be redeemed by the end
of the March 2000 quarter. Ashland's net cost for the U.S.
construction business of Superfos was approximately $537 million.
Primarily as a result of this acquisition, APAC's total assets
increased from $996 million at September 30, 1999, to $1.583
billion at December 31, 1999. APAC's capital employed increased
from $663 million at September 30, 1999, to $1.196 billion at
December 31, 1999. For Ashland's fiscal year ended September 30,
1999, the U.S. construction operations of Superfos generated sales
and operating revenues of $557 million and operating income of
$30 million.
The acquisition was funded with short-term debt and a $600
million, floating-rate bank credit agreement that matures in
increasing payments between 2000 and 2004. As a result of this new
debt and the $203 million charge to earnings resulting from Arch
Coal's asset impairment write-down and restructuring costs (see
Note B), Ashland's debt amounted to 58% of capital employed at
December 31, 1999. Ashland intends to reduce debt upon redemption
of the $285 million note in the March 2000 quarter.
9
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended
December 31
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(In millions) 1999 1998
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REVENUES
Sales and operating revenues
APAC $ 605 $ 428
Ashland Distribution 768 706
Ashland Specialty Chemical 314 309
Valvoline 239 234
Intersegment sales
Ashland Distribution (10) (8)
Ashland Specialty Chemical (19) (22)
Valvoline - (1)
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1,897 1,646
Equity income (loss)
Ashland Specialty Chemical 1 1
Refining and Marketing 36 (40)
Arch Coal (237) (1)
------------ ------------
(200) (40)
Other income
APAC 2 2
Ashland Distribution 2 2
Ashland Specialty Chemical 6 5
Valvoline 1 2
Refining and Marketing 2 9
Corporate 1 7
------------ ------------
14 27
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$ 1,711 $ 1,633
============ ============
OPERATING INCOME (1)
APAC $ 38 $ 26
Ashland Distribution 13 13
Ashland Specialty Chemical 29 28
Valvoline 11 11
Refining and Marketing 33 (41)
Arch Coal (238) (1)
Corporate (13) (20)
------------ ------------
$ (127) $ 16
============ ============
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(1) See Note B to the Condensed Consolidated Financial Statements for a discussion of unusual items.
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended
December 31
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1999 1998
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OPERATING INFORMATION
APAC
Construction backlog at December 31 (millions) $ 1,210 $ 770
Hot mix asphalt production (million tons) 8.8 6.8
Aggregate production (million tons) 6.4 5.2
Ready-mix concrete production (thousand cubic yards) 597 332
Ashland Distribution (1)
Sales per shipping day (millions) $ 12.6 $ 11.4
Gross profit as a percent of sales 15.5% 15.7%
Ashland Specialty Chemical (1)
Sales per shipping day (millions) $ 5.1 $ 5.0
Gross profit as a percent of sales 36.0% 36.1%
Valvoline lubricant sales (thousand barrels per day) 11.3 11.5
Refining and Marketing (2)
Refined products sold (thousand barrels per day) 1,320 1,239
Crude oil refined (thousand barrels per day) 824 862
Merchandise sales (millions) $ 543 $ 487
Arch Coal (2)
Tons sold (millions) 28.4 26.5
Tons produced (millions) 28.6 24.8
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(1) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses, less depreciation and amortization relative to
manufacturing assets.
(2) Amounts represent 100 percent of the volumes of MAP or Arch Coal.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
Ashland recorded a net loss of $166 million for the quarter ended
December 31, 1999, compared to a net loss of $11 million for the
quarter ended December 31, 1998. Excluding unusual items described
in Note B to the Condensed Consolidated Financial Statements, net
income amounted to $37 million in the 1999 period, compared to $46
million in the 1998 period. The decline was due to higher crude
oil prices and continued weakness in eastern coal markets, which
affected Ashland's equity investments, and increased interest
expense resulting from debt incurred to purchase the U.S.
construction operations of Superfos a/s. Combined operating income
from Ashland's wholly owned businesses was up 17%. The increase
came primarily from APAC, which benefited from the Superfos
acquisition and a change in estimated depreciable lives and
salvage values for APAC's construction equipment. Operating income
from Ashland Distribution, Ashland Specialty Chemical and
Valvoline was comparable to prior year results.
APAC
Operating income from APAC's construction operations totaled $38
million for the December 1999 quarter, up $12 million from the
December 1998 quarter. Results reflect 10 weeks of operations and
$6 million in operating income from the recently acquired U.S.
construction operations of Superfos (see Note E to the Condensed
Consolidated Financial Statements). The integration of these new
operations is proceeding as planned and further progress is
expected during the winter season, typically a slower period for
the construction industry. The increased earnings also reflect a
$5 million reduction in depreciation expense related to changes in
the estimated useful lives and salvage values of APAC's
construction equipment. The construction backlog at December 31,
1999, amounted to $1.21 billion, up 57% from the December 1998
level. The Superfos operations added $305 million to the backlog.
As a result of the Superfos acquisition, 13 other acquisitions
completed during the past year, the growth of the historical APAC
businesses and the change in depreciation, Ashland expects APAC to
generate operating income of roughly $170 million in fiscal 2000,
up from $108 million in fiscal 1999.
ASHLAND DISTRIBUTION
Ashland Distribution reported operating income of $13 million for
the quarter ended December 31, 1999, even with results for last
year's December quarter. General Polymers and FRP Supply continued
to build on record performances achieved in fiscal 1999. Both
units benefited from improved sales volumes and FRP Supply also
achieved higher margins. Ashland Plastics Europe improved due to
an increase in their gross profit percentage. However, results for
Industrial Chemicals & Solvents declined due to higher costs for
petroleum based raw materials, reflecting rising crude oil prices.
During the quarter, Ashland announced two external e-commerce
alliances and successfully launched customized e-commerce web
sites for Industrial Chemicals & Solvents, General Polymers and
FRP Supply. Initial acceptance and growth rates are promising, and
work continues on adding additional product lines to this exciting
channel.
ASHLAND SPECIALTY CHEMICAL
For the quarter ended December 31, 1999, Ashland Specialty
Chemical reported operating income of $29 million, compared to $28
million reported for the December 1998 quarter. Specialty Polymers
&
12
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
ASHLAND SPECIALTY CHEMICAL (CONTINUED)
Adhesives set a December quarter profit record on the strength of
continued good performance in the pressure-sensitive adhesives and
specialty resins product lines. Drew Industrial also achieved
record December quarter results and Electronic Chemicals continued
its improvement following the worldwide semiconductor recession in
1998. However, results for Composite Polymers declined due to
lower margins.
VALVOLINE
Valvoline reported operating income of $11 million for the
December 1999 quarter, even with results for the December 1998
quarter. Although volumes remained strong for Valvoline's branded
lubricants business, margins were adversely affected by increased
prices of lube base stocks, reflecting higher crude oil prices. In
addition, Valvoline Instant Oil Change declined due to higher
operating costs. These declines were offset primarily by stronger
fundamentals in the antifreeze business and a slight improvement
in international operations.
REFINING AND MARKETING
Operating income from Refining and Marketing amounted to $33
million for the quarter ended December 31, 1999. This compares to
$52 million for the quarter ended December 31, 1998 (excluding $93
million in unfavorable inventory market valuation adjustments).
Results for both periods include Ashland's 38% share of MAP's
earnings, amortization of Ashland's excess investment in MAP, and
results of certain retained refining and marketing activities. The
decline in operating income was primarily due to reduced margins
at both the wholesale and retail levels, as prices of refined
products did not keep pace with increases in crude oil prices. In
addition to the decline in refined product margins, the
merchandise margin percentage for the retail operations was also
down. The margin declines were partially offset by higher refined
product sales volumes at both the wholesale and retail levels, and
increased merchandise sales volumes for the retail operations. In
addition, transportation operations showed an improvement over the
prior year, due to the elimination of losses incurred by the
former Scurlock Permian operations that were sold in April 1999.
During the quarter, MAP completed the purchase of certain Michigan
assets from Ultramar Diamond Shamrock. This acquisition, which
included 178 company-owned retail outlets, will help strengthen
MAP's market position in the Midwest.
ARCH COAL
Excluding the $235 million charge for asset impairment and
restructuring costs described in Note B to the Condensed
Consolidated Financial Statements, Ashland recorded a loss of $3
million from its investment in Arch Coal for the December 1999
quarter, compared to a loss of $1 million for the December 1998
quarter. The decline reflects extremely depressed eastern coal
prices, rail service problems at Arch's eastern mines, and a
difficult longwall move that reduced operating income at the Mingo
Logan operation in southern West Virginia. Ashland continues to
pursue spin-off alternatives for its investment in Arch, including
both tax-free and taxable distributions.
13
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
CORPORATE
Corporate expenses amounted to $13 million in the quarter ended
December 31, 1999, compared to $20 million for the quarter ended
December 31, 1998. The prior year quarter included transition
costs associated with the restructuring of corporate general and
administrative functions and the relocation of corporate
headquarters to Covington, Ky. The current year quarter includes
environmental insurance recoveries and lower incentive
compensation costs.
INTEREST EXPENSE (NET OF INTEREST INCOME)
For the quarter ended December 31, 1999, interest expense (net of
interest income) totaled $43 million, compared to $33 million for
the December 1998 quarter. The increase reflects higher debt
levels resulting primarily from the $600 million, floating-rate
bank credit agreement and short-term debt used to finance the
acquisition of the U.S. construction operations of Superfos.
Ashland intends to reduce debt in the March 2000 quarter from
proceeds of the expected redemption of the $285 million note
received in connection with the sale of the non-U.S. construction
operations of Superfos.
FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to obtain capital for
its financing needs and to maintain investment grade ratings on
its senior debt of Baa2 from Moody's and BBB from Standard &
Poor's. Ashland has two revolving credit agreements providing for
up to $400 million in borrowings, neither of which was in use at
December 31, 1999. Under a shelf registration, Ashland can also
issue an additional $450 million in debt and equity securities
should future opportunities or needs arise. Furthermore, Ashland
has access to various uncommitted lines of credit and commercial
paper markets, under which $478 million of short-term borrowings
were outstanding at December 31, 1999. The revolving credit
agreements contain a covenant limiting new borrowings. Primarily
due to the debt incurred to finance the acquisition of the U.S.
construction operations of Superfos and the $203 million charge to
earnings resulting from Arch Coal's asset impairment write-down
and restructuring costs, additional debt permissible has been
reduced from $1.454 billion at September 30, 1999, to $216 million
at December 31, 1999. Ashland intends to reduce debt in the March
2000 quarter from proceeds of the expected redemption of the $285
million note received in the Superfos transaction, thereby
increasing additional debt permissible by an equal amount.
Cash flows from operations, a major source of Ashland's liquidity,
amounted to a deficit of $9 million for the quarter ended December
31, 1999, compared to $73 million for the quarter ended December
31, 1998. The decrease reflects reduced cash distributions from
MAP and increased working capital requirements. Ashland's capital
requirements for net property additions and dividends exceeded
cash flows from operations by $90 million for the quarter ended
December 31, 1999.
Operating working capital (accounts and notes receivable, plus
inventories, less trade and other payables) at December 31, 1999,
was $1.024 billion, compared to $548 million at September 30,
1999, and $508 million at December 31, 1998. Liquid assets (cash,
cash equivalents, accounts and notes receivable) amounted to 95%
of current liabilities at December 31, 1999, compared to 95% at
September 30, 1999, and 84% at December 31, 1998. Ashland's
working capital is affected by its use of the LIFO method of
inventory valuation, which valued inventories $57 million below
their replacement costs at December 31, 1999.
14
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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CAPITAL RESOURCES
For the quarter ended December 31, 1999, property additions
amounted to $65 million, compared to $48 million for the same
period last year. Property additions and cash dividends for the
remainder of fiscal 2000 are estimated at $225 million and $60
million. Under Ashland's share repurchase program initiated in
August 1998, Ashland had repurchased 7.3 million shares through
December 31, 1999, with remaining authority to repurchase an
additional 2.1 million shares. The number of shares ultimately
purchased and the prices Ashland will pay for its stock are
subject to periodic review by management. Ashland anticipates
meeting its remaining 2000 capital requirements for property
additions, dividends and scheduled debt repayments of $63 million
from internally generated funds. However, external financing may
be necessary to fund common stock repurchases and acquisitions.
At December 31, 1999, Ashland's debt level amounted to $2.742
billion, compared to $1.846 billion at September 30, 1999. The
increase reflects a $600 million, floating-rate bank credit
agreement and short-term debt incurred to finance the acquisition
of the U.S. construction operations of Superfos. Common
stockholders' equity decreased by $228 million during the quarter
ended December 31, 1999, reflecting the $203 million charge to
earnings resulting from Arch Coal's asset impairment write-down
and restructuring costs. As a result, debt as a percent of capital
employed amounted to 58% at December 31, 1999, compared to 46% at
September 30, 1999. Ashland's long-term debt included $638 million
of floating-rate debt at December 31, 1999. As a result, Ashland's
interest costs for the remainder of 2000 will fluctuate based on
short-term interest rates on that portion of its long-term debt
outstanding, as well as on any short-term notes and commercial
paper.
ENVIRONMENTAL MATTERS
Federal, state and local laws and regulations relating to the
protection of the environment have resulted in higher operating
costs and capital investments by the industries in which Ashland
operates. Because of the continuing trends toward greater
environmental awareness and ever increasing regulations, Ashland
believes that expenditures for environmental compliance will
continue to have a significant effect on its businesses. Although
it cannot accurately predict how such trends will affect future
operations and earnings, Ashland believes the nature and
significance of its ongoing compliance costs will be comparable to
those of its competitors. For information on certain specific
environmental proceedings and investigations, see the "Legal
Proceedings" section of this Form 10-Q. For information regarding
environmental reserves, see the "Miscellaneous - Environmental
Matters" section of Ashland's Form 10-K.
Environmental reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share
of the ultimate costs of required remediation efforts. Such
uncertainties involve the nature and extent of contamination at
each site, the extent of required cleanup efforts under existing
environmental regulations, widely varying costs of alternate
cleanup methods, changes in environmental regulations, the
potential effect of continuing improvements in remediation
technology, and the number and financial strength of other
potentially responsible parties at multiparty sites. Reserves are
regularly adjusted as environmental assessments and remediation
efforts proceed.
Ashland does not believe that any liability resulting from
environmental matters, after taking into consideration its
insurance coverage and amounts already provided for, will have a
material adverse effect on its consolidated financial position,
cash flows or liquidity. However, such matters could have a
material effect on results of operations in a particular quarter
or fiscal year as they develop or as new issues are identified.
15
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
YEAR 2000
Ashland experienced no significant Year 2000 transition problems
and does not anticipate any significant problems in the future.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, with respect to
Ashland's operating performance and earnings. Estimates as to
operating performance and earnings are based upon a number of
assumptions, including (among others) prices, supply and demand,
market conditions, cost of raw materials, weather and operating
efficiencies. Although Ashland believes that its expectations are
based on reasonable assumptions, it cannot assure that the
expectations reflected herein will be achieved. This
forward-looking information may prove to be inaccurate, and actual
results may differ significantly from those anticipated. Other
factors and risks affecting Ashland are contained in Ashland's
Form 10-K for the fiscal year ended September 30, 1999.
16
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings - (1) As of December 31, 1999, Ashland
had been identified as a "potentially responsible party" ("PRP")
under Superfund or similar state laws for potential joint and
several liability for clean-up costs in connection with alleged
releases of hazardous substances in connection with 89 waste
treatment or disposal sites. These sites are currently subject to
ongoing investigation and remedial activities, overseen by the EPA
or a state agency, in which Ashland is typically participating as
a member of a PRP group. Generally, the type of relief sought
includes remediation of contaminated soil and/or groundwater,
reimbursement for past costs of site clean-up and administrative
oversight, and/or long-term monitoring of environmental conditions
at the sites. Ashland carefully monitors the investigatory and
remedial activity at many of these sites. Based on its experience
with site remediation, its familiarity with current environmental
laws and regulations, its analysis of the specific hazardous
substances at issue, the existence of other financially viable
PRPs and its current estimates of investigatory, clean-up and
monitoring costs at each site, Ashland believes that its liability
at these sites, either individually or in the aggregate, after
taking into account its insurance coverage and established
financial reserves, will not have a material adverse effect on
Ashland's consolidated financial position, cash flow or liquidity.
However, such matters could have a material effect on Ashland's
results of operations in a particular quarter or fiscal year as
they develop or as new issues are identified. Estimated costs for
these matters are recognized in accordance with generally accepted
accounting principles governing the likelihood that costs will be
incurred and Ashland's ability to reasonably estimate future
costs.
(2) Pursuant to a 1990 Agreed Order with the Commonwealth of
Kentucky's Natural Resources and Environmental Protection Cabinet
("NREPC"), Ashland has conducted source investigation and remedial
activities related to hydrocarbon contamination of the groundwater
beneath the Catlettsburg, Kentucky refinery, operated since 1998
by Marathon Ashland Petroleum LLC ("MAP"). In 1999, Ashland and
the NREPC initiated negotiations for a new Agreed Order which
would identify future investigative efforts and establish
timetables for strategic remedial activities. This Order is also
expected to include a monetary penalty. In connection with the
formation of MAP, Ashland agreed to retain responsibility for this
matter. Because discussions are ongoing, Ashland is unable to
predict what the final penalty amount might be. However, the
penalty amount is not expected to have a material adverse effect
on Ashland's consolidated financial position, cash flow or
liquidity.
Lockheed Litigation - Ashland was a defendant in a series of cases
involving more than 600 former workers at the Lockheed aircraft
manufacturing facility in Burbank, California. The plaintiffs
alleged personal injuries resulting from exposure to chemicals
sold to Lockheed by Ashland, and inadequate labeling of such
chemicals. The parties have executed an agreement to fully resolve
and settle this matter, which is subject to approval by the court.
Ashland believes the settlement amount, which is not material to
Ashland, will be covered by insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended December 31, 1999, Ashland issued an
additional 24,613 shares of its Common Stock, par value $1.00 per
share in connection with the acquisition of Crowell Constructors,
Inc. which closed on February 12, 1999. The shares were issued in
a transaction exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended, and the regulations
thereunder.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Ashland's Annual Meeting of Shareholders was held on January
27, 2000, at the Metropolitan Club, 50 E. RiverCenter
Boulevard, Covington, Kentucky at 10:30 a.m.
(b) Ashland's shareholders at said meeting elected three directors
(Paul W. Chellgren, Patrick F. Noonan, Jane C. Pfeiffer) to
serve a three-year term and one director (Theodore M. Solso)
to serve a one-year term.
Votes
-----
Affirmative Withheld
----------- --------
- Paul W. Chellgren 60,376,783 4,132,767
- Patrick F. Noonan 59,642,322 4,867,228
- Jane C. Pfeiffer 61,099,263 3,410,287
- Theodore M. Solso 61,233,483 3,276,067
Directors who continued in office: Frank C. Carlucci, James B.
Farley, Bernadine P. Healy, M.D., W. L. Rouse, Jr., Samuel C.
Butler, Ernest H. Drew and Mannie L. Jackson.
(c) Ashland's shareholders at said meeting ratified the
appointment of Ernst & Young LLP as independent auditors for
fiscal year 2000 by a vote of 63,128,619 affirmative, to
1,073,518 negative and 307,413 abstention votes.
(d) Ashland's shareholders at said meeting approved the Ashland
Inc. Incentive Plan by a vote of 55,193,588 affirmative, to
8,255,757 negative and 1,060,205 abstention votes.
(e) The results of voting on a shareholder proposal to spin-off
Ashland Chemical, APAC and Valvoline as three separate
companies were 50,678,646 negative, to 8,398,101 affirmative,
1,123,893 abstention votes and 4,308,910 broker non-votes.
(f) The results on a shareholder proposal recommending that the
Board of Directors engage the services of a nationally
recognized investment banker to explore alternatives to
enhance the value of Ashland were 39,290,327 negative, to
19,770,843 affirmative, 1,139,470 abstention votes and
4,308,910 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.2 By-laws of Ashland, as amended to January 26, 2000
10.1 Ashland Inc. Incentive Plan
12 Computation of Ratios of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividends
27 Financial Data Schedule
18
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 6, 1999 to announce that
a tax-free spin-off would be Ashland's preferred alternative for
its investment in Arch Coal. The report also noted that Ashland is
reviewing its alternatives with respect to a change in its
ownership in MAP.
A report on Form 8-K was filed on October 12, 1999 to announce
that shareholders representing more than 90% of the share capital
of Superfos a/s accepted Ashland's September 27, 1999 offer and
that Ashland will implement the tender offer.
A report on Form 8-K was filed on January 24, 2000 to announce
that Ashland continues to pursue spin-off alternatives for its
investment in Arch Coal, including both tax-free and taxable
distributions.
19
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.
Ashland Inc.
------------------------------------
(Registrant)
Date: /s/ Kenneth L. Aulen
------------------------------------
Kenneth L. Aulen
Administrative Vice President and
Controller (Chief Accounting Officer)
Date: /s/ David L. Hausrath
------------------------------------
David L. Hausrath
Vice President and General Counsel
20
EXHIBIT INDEX
Exhibit No. Description
- ----------- --------------------------------------------------------
3.2 By-laws of Ashland, as amended to January 26, 2000
10.1 Ashland Inc. Incentive Plan
12 Computation of Ratios of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividends
27 Financial Data Schedule