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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, 2000
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: (859) 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, 2001, there were 69,576,879 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) 2000 1999
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REVENUES
Sales and operating revenues $ 1,878 $ 1,897
Equity income 121 37
Other income 14 14
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2,013 1,948
COSTS AND EXPENSES
Cost of sales and operating expenses 1,546 1,537
Selling, general and administrative expenses 265 243
Depreciation, depletion and amortization 58 57
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1,869 1,837
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OPERATING INCOME 144 111
Net interest and other financial costs (46) (43)
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 98 68
Income taxes (39) (28)
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INCOME FROM CONTINUING OPERATIONS 59 40
Loss from discontinued operations (net of income taxes) - (206)
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NET INCOME (LOSS) $ 59 $ (166)
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BASIC EARNINGS (LOSS) PER SHARE - Note A
Income from continuing operations $ .84 $ .56
Loss from discontinued operations - (2.88)
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Net income (loss) $ .84 $ (2.32)
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DILUTED EARNINGS (LOSS) PER SHARE - Note A
Income from continuing operations $ .84 $ .55
Loss from discontinued operations - (2.87)
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Net income (loss) $ .84 $ (2.32)
========== =========
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) 2000 2000 1999
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 108 $ 67 $ 46
Accounts receivable 1,153 1,268 1,274
Allowance for doubtful accounts (30) (25) (24)
Note receivable from Industri Kapital (1) - - 285
Inventories - Note A 528 488 522
Deferred income taxes 126 135 99
Other current assets 108 198 124
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1,993 2,131 2,326
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 2,209 2,295 2,140
Cost in excess of net assets of companies acquired 528 537 503
Investment in Arch Coal - discontinued operations 35 35 178
Other noncurrent assets 377 351 291
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3,149 3,218 3,112
PROPERTY, PLANT AND EQUIPMENT
Cost 2,898 2,879 2,902
Accumulated depreciation, depletion and amortization (1,496) (1,457) (1,390)
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1,402 1,422 1,512
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$ 6,544 $ 6,771 $ 6,950
========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt due within one year $ 268 $ 327 $ 544
Trade and other payables 1,114 1,330 1,033
Income taxes 181 42 87
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1,563 1,699 1,664
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,874 1,899 2,198
Employee benefit obligations 386 383 421
Deferred income taxes 174 288 139
Reserves of captive insurance companies 202 179 179
Other long-term liabilities and deferred credits 352 358 377
Commitments and contingencies - Note D
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2,988 3,107 3,314
COMMON STOCKHOLDERS' EQUITY 1,993 1,965 1,972
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$ 6,544 $ 6,771 $ 6,950
========== ========== =========
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(1) This note, received in connection with the acquisition of the U.S. construction operations of Superfos, was redeemed
in the March 2000 quarter.
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, 1999 $ 72 $ 464 $ 1,710 $ (46) $ 2,200
Total comprehensive income (loss) (1) (166) (6) (172)
Cash dividends (19) (19)
Issued common stock for
acquisitions of other companies 1 1
Repurchase of common stock (1) (37) (38)
--------- --------- ---------- ----------- --------
BALANCE AT DECEMBER 31, 1999 $ 71 $ 428 $ 1,525 $ (52) $ 1,972
========= ========= ========== =========== ========
BALANCE AT OCTOBER 1, 2000 $ 70 $ 388 $ 1,579 $ (72) $ 1,965
Total comprehensive income (1) 59 (8) 51
Cash dividends (19) (19)
Issued common stock under
stock incentive plans 5 5
Repurchase of common stock (9) (9)
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BALANCE AT DECEMBER 31, 2000 $ 70 $ 384 $ 1,619 $ (80) $ 1,993
========= ========= ========== =========== ========
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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) 2000 1999
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Net income (loss) $ 59 $ (166)
Unrealized translation adjustments (10) (10)
Related tax benefit 2 4
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Total comprehensive income (loss) $ 51 $ (172)
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At December 31, 2000, the accumulated other comprehensive loss was comprised of net unrealized translation losses of $72
million and a minimum pension liability of $8 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) 2000 1999
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CASH FLOWS FROM CONTINUING OPERATIONS
Income from continuing operations $ 59 $ 40
Expense (income) not affecting cash
Depreciation, depletion and amortization 58 57
Deferred income taxes 13 (7)
Equity income from affiliates (121) (37)
Distributions from equity affiliates 209 68
Change in operating assets and liabilities (1) (31) (132)
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187 (11)
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt - 636
Proceeds from issuance of common stock 2 -
Repayment of long-term debt (38) (40)
Repurchase of common stock (9) (38)
Increase (decrease) in short-term debt (46) 296
Dividends paid (19) (19)
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(110) 835
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (40) (65)
Purchase of operations - net of cash acquired (2) (8) (825)
Proceeds from sale of operations 9 -
Other - net 3 -
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(36) (890)
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CASH PROVIDED (USED) BY CONTINUING OPERATIONS 41 (66)
Cash provided by discontinued operations - 2
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 41 (64)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 67 110
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 108 $ 46
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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.
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, 2000. Results of
operations for the period ended December 31, 2000, are not
necessarily indicative of results to be expected for the year
ending September 30, 2001.
INVENTORIES
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December 31 September 30 December 31
(In millions) 2000 2000 1999
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Chemicals and plastics $ 411 $ 375 $ 394
Construction materials 76 80 73
Petroleum products 65 52 54
Other products 42 45 52
Supplies 7 7 6
Excess of replacement costs over LIFO carrying values (73) (71) (57)
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$ 528 $ 488 $ 522
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EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share (EPS) from continuing operations.
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Three months ended
December 31
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(In millions except per share data) 2000 1999
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NUMERATOR
Numerator for basic and diluted EPS - Income from
continuing operations $ 59 $ 40
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DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 70 72
Common shares issuable upon exercise of stock options - -
----------- ----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 70 72
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BASIC EPS FROM CONTINUING OPERATIONS $ .84 $ .56
DILUTED EPS FROM CONTINUING OPERATIONS $ .84 $ .55
6
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - SIGNIFICANT ACCOUNTING POLICIES (continued)
DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 was subsequently
amended by two other statements and is required to be adopted in
years beginning after June 15, 2000. Because of Ashland's minimal
use of derivatives, FAS 133 did not have a significant effect on
Ashland's financial position or results of operations when it was
adopted on October 1, 2000. MAP's adoption of FAS 133 on January
1, 2001, resulted in a $20 million pretax loss from the cumulative
effect of this accounting change. Ashland's after tax share of the
loss amounts to $5 million and will be recorded in the March 2001
quarter.
NOTE B - UNUSUAL ITEMS
DISCONTINUED OPERATIONS
In March 2000, Ashland distributed 17.4 million shares of its Arch
Coal Common Stock to Ashland's shareholders. Ashland intends to
dispose of its remaining 4.7 million Arch Coal shares in a
transaction or transactions that qualify as a sale for federal
income tax purposes by March 2001. Arch Coal has filed a
registration statement for the sale of these shares by Ashland in
an underwritten public offering.
Results from Arch Coal are shown as discontinued operations.
Components of amounts reflected in income are presented in the
following table. Results for the three months ended December 31,
1999, included a net loss of $203 million related to asset
impairment and restructuring costs, largely due to the write-down
of assets at Arch's Dal-Tex and Hobet 21 mining operations and
certain coal reserves in central Appalachia.
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Three months ended
December 31
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(In millions) 2000 1999
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Revenues - Equity loss $ - $ (237)
Costs and expenses - SG&A expenses - (1)
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Operating loss - (238)
Income tax benefit - 32
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Loss from discontinued operations $ - $ (206)
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The following tables show the effects of discontinued operations
on Ashland's net income and diluted earnings per share for the
periods ended December 31, 2000, and 1999.
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Three months ended
December 31
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(In millions except per share data) 2000 1999
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Net income before unusual items $ 59 $ 40
Loss from discontinued operations - (206)
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Net income (loss) as reported $ 59 $ (166)
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Diluted earnings per share before unusual items $ .84 $ .55
Impact of unusual items - (2.87)
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Diluted earnings (loss) per share as reported $ .84 $ (2.32)
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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 significant unconsolidated
affiliate, Marathon Ashland Petroleum LLC (MAP). Ashland's
ownership position in Arch Coal, Inc. met those same filing
requirements prior to the spin-off described in Note B. Financial
statements for MAP and Arch Coal for the year ended December 31,
1999, were filed on a Form 10-K/A on March 21, 2000. Financial
statements for MAP for the year ended December 31, 2000, will be
filed by means of a Form 10-K/A on or before March 31, 2001.
Unaudited income statement information for MAP is shown below.
MAP is organized as a limited liability company 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) 2000 1999
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Sales and operating revenues $ 7,363 $ 5,924
Income from operations 327 106
Net income 329 111
Ashland's equity income 119 36
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.
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.
8
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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) 2000 1999
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REVENUES
Sales and operating revenues
APAC $ 621 $ 605
Ashland Distribution 731 768
Ashland Specialty Chemical 311 314
Valvoline 241 239
Intersegment sales
Ashland Distribution (8) (10)
Ashland Specialty Chemical (18) (19)
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1,878 1,897
Equity income
Ashland Specialty Chemical 1 1
Valvoline 1 -
Refining and Marketing 119 36
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121 37
Other income
APAC 2 2
Ashland Distribution 2 2
Ashland Specialty Chemical 7 6
Valvoline 1 1
Refining and Marketing - 2
Corporate 2 1
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14 14
------------ ------------
$ 2,013 $ 1,948
============ ============
OPERATING INCOME
APAC $ 13 $ 38
Ashland Distribution 10 13
Ashland Specialty Chemical 18 29
Valvoline 10 11
Refining and Marketing (1) 109 33
Corporate (16) (13)
------------ ------------
$ 144 $ 111
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(1) Includes Ashland's equity income from MAP, amortization of Ashland's
excess investment in MAP, and certain retained refining and marketing
activities.
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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2000 1999
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OPERATING INFORMATION
APAC
Construction backlog at December 31 (millions) $ 1,600 $ 1,210
Hot mix asphalt production (million tons) 8.5 8.8
Aggregate production (million tons) 5.9 6.4
Ready-mix concrete production (thousand cubic yards) 523 597
Ashland Distribution (1)
Sales per shipping day (millions) $ 12.0 $ 12.6
Gross profit as a percent of sales 15.6% 15.6%
Ashland Specialty Chemical (1)
Sales per shipping day (millions) $ 5.1 $ 5.1
Gross profit as a percent of sales 34.0% 36.0%
Valvoline lubricant sales (thousand barrels per day) 10.5 11.3
Refining and Marketing (2)
Refined products sold (thousand barrels per day) 1,308 1,320
Crude oil refined (thousand barrels per day) 857 824
Merchandise sales (millions) $ 551 $ 543
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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, in which Ashland
owns a 38 percent interest.
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
Ashland's net income was $59 million for the quarter ended
December 31, 2000, compared to a net loss of $166 million for the
quarter ended December 31, 1999. Excluding the $206 million loss
from discontinued operations in the 1999 period described in Note
B to the Condensed Consolidated Financial Statements, net income
amounted to $59 million in the 2000 period, compared to $40
million in the 1999 period. Operating income of $144 million was a
record for the December quarter and a 30% improvement over the
prior year period. The increase reflected improved refining
margins and a positive in-transit crude oil inventory adjustment
for Marathon Ashland Petroleum (MAP), which more than offset the
impact of the early arrival of winter and a softer economy on
Ashland's wholly owned businesses.
APAC
Operating income from APAC's construction operations declined to
$13 million for the December 2000 quarter, compared to $38 million
in the December 1999 quarter, reflecting the adverse impact of
unusually severe weather in November and December 2000. In many
markets weather patterns prevented APAC crews from being on the
job and limited demand for aggregates and hot mix asphalt. Net
construction revenue (total revenue less subcontract costs)
declined 6% from the prior year period, while production of hot
mix asphalt declined 3%, aggregate production declined 8%, and
ready-mix concrete production declined 12%. Earnings from the
asphalt plants were also adversely affected as increased costs for
liquid asphalt, fuel and power were not fully recovered in APAC's
hot mix asphalt prices. The construction backlog at December 31,
2000, amounted to a record $1.6 billion, a 32% improvement over
the prior year, including a recently awarded $236 million contract
in the Richmond, Virginia area. The backlog is healthy in terms of
volumes and margins and includes a good mix of public and private
projects.
ASHLAND DISTRIBUTION
Ashland Distribution reported operating income of $10 million for
the quarter ended December 31, 2000, a 23% decline from the $13
million reported for last year's December quarter. Factors
contributing to the performance include lower demand-driven
volumes and reduced prices in North American commodity product
lines, impacting the thermoplastics and fiber-reinforced plastics
businesses. On a positive note, chemical distribution profits
improved, as costs continued to be taken out of the business. In
addition, European thermoplastics distribution improved reflecting
the stronger European market, and fine ingredients and
environmental services businesses improved, as both are less
commodity-sensitive.
ASHLAND SPECIALTY CHEMICAL
For the quarter ended December 31, 2000, Ashland Specialty
Chemical reported operating income of $18 million, a 38% decline
from the $29 million reported for the December 1999 quarter.
Results from three of Ashland's specialty chemical businesses
reflect the impact of a weaker U.S. economy. Soft demand in
transportation and construction markets resulted in unit volume
declines for unsaturated polyester resins, adhesives and foundry
chemicals. Margins were down in these businesses due not only to
reduced demand, but also to higher costs for raw materials.
Petrochemical margins also suffered from significantly higher
butane costs. However, earnings from electronic chemicals, water
treatment and marine chemicals improved, as these businesses are
generally not as sensitive to weakness in the durable goods
sector.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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VALVOLINE
For the quarter ended December 31, 2000, Valvoline reported
operating income of $10 million, compared to $11 million for the
December 1999 quarter. The slight decline was primarily due to
continued margin compression in the antifreeze business and
minimal sales of R-12 automotive refrigerant. R-12 sales are
typically low in the December quarter. Profits from the core
lubricants business improved while Valvoline Instant Oil Change
produced earnings similar to last year.
REFINING AND MARKETING
Operating income from Refining and Marketing, which consists
primarily of equity income from MAP, amounted to $109 million for
the quarter ended December 31, 2000, compared to $33 million for
the quarter ended December 31, 1999. Crude oil prices on the New
York Mercantile Exchange declined $4 per barrel during the quarter
as a result of stronger worldwide production. The combination of
lower crude oil costs and good demand for distillates led to
stronger refining margins. MAP's results also reflect a positive
in-transit crude oil inventory adjustment, which was generated by
the sharp December decline in crude oil prices. Results from
retail operations were down as pump prices failed to keep pace
with the higher level of wholesale gasoline costs. Merchandise
sales were up, but the impact was more than offset by a decline in
merchandise margins from the very strong levels in last year's
December quarter.
CORPORATE
Corporate expenses amounted to $16 million in the quarter ended
December 31, 2000, compared to $13 million for the quarter ended
December 31, 1999. The higher level of expenses reflects increases
in incentive and deferred compensation costs in the current year
period, as well as environmental insurance recoveries included in
the prior year period.
NET INTEREST AND OTHER FINANCIAL COSTS
For the quarter ended December 31, 2000, net interest and other
financial costs totaled $46 million, compared to $43 million for
the December 1999 quarter. Although debt levels are down, net
costs are up, as the prior year period included interest income on
the note receivable from Industri Kapital, received in connection
with the acquisition of the U.S. construction operations of
Superfos. In addition, the current year period includes costs
associated with the sale of $150 million of receivables under a
program initiated in March 2000.
DISCONTINUED OPERATIONS
As described in Note B to the Condensed Consolidated Financial
Statements, in March 2000 Ashland distributed to Ashland
shareholders the major portion of its common shares of Arch Coal.
As a result, the former Arch Coal segment is shown as a
discontinued operation, with prior periods restated.
For the three months ended December 31, 1999, Ashland recorded an
equity loss of $206 million from its investment in Arch Coal. The
loss included $203 million related to asset impairment and
restructuring costs, largely due to the write-down of assets at
Arch's Dal-Tex and Hobet 21 mining operations and certain coal
reserves in central Appalachia.
12
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
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 $425 million in borrowings, neither of which was used during
the three months ended December 31, 2000. Under a shelf
registration, at December 31, 2000, Ashland could also issue an
additional $350 million in debt and equity securities should
future opportunities or needs arise. On February 2, 2001, Ashland
issued $50 million in medium-term notes under this shelf
registration, thereby reducing the remaining capacity to $300
million. Furthermore, Ashland has access to various uncommitted
lines of credit and commercial paper markets, under which $199
million of short-term borrowings were outstanding at December 31,
2000. While the revolving credit agreements contain a covenant
limiting new borrowings, Ashland could have increased its
borrowings (including any borrowings under these agreements) by up
to $848 million at December 31, 2000. Additional permissible
borrowings are increased or decreased by 150% of any increases or
decreases in stockholders' equity.
Cash flows from continuing operations, a major source of Ashland's
liquidity, amounted to $187 million for the three months ended
December 31, 2000, compared to a deficit of $11 million for the
three months ended December 31, 1999. The increase principally
reflects increased cash distributions from MAP ($207 million in
2000, compared to $67 million in 1999). In addition, the growth in
working capital during the current quarter was much less than in
the 1999 period. Ashland's cash flows from continuing operations
exceeded its capital requirements for net property additions and
dividends by $123 million for the three months ended December 31,
2000, providing additional funds for debt repayment and
acquisitions.
Operating working capital (accounts and notes receivable, plus
inventories, less trade and other payables) at December 31, 2000,
was $537 million, compared to $401 million at September 30, 2000,
and $1,024 million at December 31, 1999. Liquid assets (cash, cash
equivalents, accounts and notes receivable) amounted to 79% of
current liabilities at December 31, 2000, compared to 77% at
September 30, 2000, and 95% at December 31, 1999. Ashland's
working capital is affected by its use of the LIFO method of
inventory valuation, which valued inventories $73 million below
their replacement costs at December 31, 2000.
CAPITAL RESOURCES
For the three months ended December 31, 2000, property additions
amounted to $40 million, compared to $65 million for the same
period last year. Property additions and cash dividends for the
remainder of fiscal 2001 are estimated at $200 million and $57
million. At December 31, 2000, Ashland had remaining authority to
purchase 2.3 million shares of its common stock in the open
market. 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 2001 capital
requirements for property additions, dividends and scheduled debt
repayments of $44 million from internally generated funds.
However, external financing may be necessary to provide funds for
acquisitions or purchases of common stock.
At December 31, 2000, Ashland's debt level amounted to $2.1
billion, compared to $2.2 billion at September 30, 2000. Debt as a
percent of capital employed amounted to 52% at December 31, 2000,
compared to 53% at September 30, 2000. Ashland's debt included
$338 million of floating-rate obligations, including $199 million
of short-term borrowings and $139 million of long-term debt, at
December 31, 2000.
13
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
CAPITAL RESOURCES (CONTINUED)
In addition, Ashland's costs under its sale of receivables program
and various operating leases are based on the floating-rate
interest costs on $255 million of third-party debt underlying
those transactions. As a result, Ashland was exposed to
fluctuations in short-term interest rates on $593 million of debt
obligations at December 31, 2000.
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.
OUTLOOK
Looking ahead to the remainder of fiscal 2001, supply and demand
fundamentals for Midwest petroleum markets, as well as forward
3-2-1 crack spreads on the New York Mercantile Exchange, suggest a
strong performance for Refining and Marketing. The outlook for
Ashland's wholly owned businesses is mixed. Certain businesses are
expected to perform well, such as Valvoline, electronic chemicals
and also APAC, provided normal spring and summer weather patterns
prevail. At this point, total operating income from wholly owned
businesses is expected to be roughly similar to the fiscal 2000
total. However, if the durable goods segment of the economy, which
affects certain parts of Ashland Specialty Chemical and Ashland
Distribution, does not recover in the second half of Ashland's
fiscal year, combined operating income from wholly owned
businesses is more likely to trail that of last year. Overall,
Ashland is optimistic that fiscal 2001 will be a good year,
assuming current trends in petroleum markets continue.
14
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
OUTLOOK (continued)
Ashland's sales and operating revenues are normally subject to
seasonal variations. Although APAC tends to enjoy a relatively
long construction season, most of its operating income is
generated during the construction period of May to October. In
addition, MAP benefits from increased demand for gasoline during
the summer driving season, higher demand for distillate during the
winter heating season and increased demand for asphalt from the
road paving industry during the construction season.
CONVERSION TO THE EURO
On January 1, 1999, certain member countries of the European
Economic and Monetary Union (EMU) established fixed conversion
rates between their existing currencies and the EMU's common
currency, the Euro. Entities in the participating countries can
conduct their business operations in either their existing
currencies or the Euro until December 31, 2001. After that date,
all non-cash transactions will be conducted in Euros and
circulation of Euro notes and coins for cash transactions will
commence. National notes and coins will be withdrawn no later than
June 30, 2002.
Ashland conducts business in most of the participating countries
and is addressing the issues associated with the Euro. The more
important issues include converting information technology systems
and processing accounting and tax records. Based on the progress
to date, Ashland believes that the use of the Euro will not have a
significant impact on the manner in which it does business and
processes its accounting records. Accordingly, the use of the Euro
is not expected to have a material effect on Ashland's
consolidated financial position, results of operations, cash flows
or liquidity.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis (MD&A) 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 various information in the
Capital Resources, Outlook and Conversion to the Euro sections of
this MD&A. Estimates as to operating performance and earnings are
based upon a number of assumptions, including those mentioned in
MD&A. Such estimates are also based upon internal forecasts and
analyses of current and future market conditions and trends,
management plans and strategies, weather, operating efficiencies
and economic conditions, such as prices, supply and demand and
cost of raw materials. Although Ashland believes its expectations
are based on reasonable assumptions, it cannot assure the
expectations reflected in MD&A will be achieved. This
forward-looking information may prove to be inaccurate and actual
results may differ significantly from those anticipated if one or
more of the underlying assumptions or expectations proves to be
inaccurate or is unrealized or if other unexpected conditions or
events occur. Other factors and risks affecting Ashland are
contained in Risks and Uncertainties in Note A to the Consolidated
Financial Statements in Ashland's 2000 Annual Report and in
Ashland's Form 10-K for the fiscal year ended September 30, 2000.
15
ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings - (1) As of December 31, 2000, 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 associated with 88 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 activities 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 a wholly owned
subsidiary of Marathon Ashland Petroleum LLC ("MAP"). In connection with
the formation of MAP, Ashland agreed to retain responsibility for this
matter. In 1999, Ashland and the NREPC initiated negotiations for a new
Agreed Order that identified future investigative efforts and established
timetables for remedial activities. This Order, which became effective on
December 4, 2000 and rescinded the 1990 Agreed Order, included a civil
penalty of $900,000, reimbursement of state oversight costs and a remedial
action project. The settlement will have no material adverse effect on
Ashland's consolidated financial position, cash flow or liquidity.
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS
(a) Ashland's Annual Meeting of Shareholders was held on January 25,
2001 at the Metropolitan Club, 50 E. RiverCenter Boulevard,
Covington, Kentucky at 10:30 a.m.
(b) Ashland's shareholders at said meeting elected four directors
(Samuel C. Butler, Ernest H. Drew, Mannie L. Jackson and Theodore
M. Solso) to serve a three-year term and one director (Ralph E.
Gomory) to serve a two-year term.
Votes
Affirmative Withheld
Samuel C. Butler 60,175,428 1,783,864
Ernest H. Drew 60,924,049 1,035,243
Mannie L. Jackson 60,844,863 1,114,429
Theodore M. Solso 60,909,128 1,050,164
Ralph E. Gomory 60,809,029 1,150,263
Directors who continued in office: Frank C. Carlucci, James B.
Farley, Bernadine P. Healy, W. L. Rouse, Jr., Paul W. Chellgren,
Patrick F. Noonan and Jane C. Pfeiffer.
16
(c) Ashland's shareholders at said meeting ratified the appointment of
Ernst & Young LLP as independent auditors for fiscal year 2001 by
a vote of 61,168,070 affirmative, to 484,455 negative and 306,767
abstention votes.
(d) Ashland's shareholders at said meeting approved the Amended and
Restated Ashland Inc. Incentive Plan by a vote of 49,724,967
affirmative, to 11,530,314 negative and 704,011 abstention votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Ashland Inc. Incentive Plan.
10.2 Tenth Amended and Restated Ashland Inc. Supplemental Early
Retirement Plan for Certain Employees.
12 Computation of Ratios of Earnings to Fixed Charges and Earnings
to Combined Fixed Charges and Preferred Stock Dividends.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
December 31, 2000.
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: February 13, 2001 /s/ Kenneth L. Aulen
-------------------------------
Kenneth L. Aulen
Administrative Vice President and Controller
(Chief Accounting Officer)
Date: February 13, 2001 /s/ David L. Hausrath
--------------------------------
David L. Hausrath
Vice President and General Counsel
EXHIBIT INDEX
Exhibit
No. Description
- ------ ---------------------------------------------------------
10.1 Amended and Restated Ashland Inc. Incentive Plan
10.2 Tenth Amended and Restated Ashland Inc. Supplemental Early
Retirement Plan for Certain Employees
12 Computation of Ratios of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges and Preferred Stock
Dividends.