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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, 1996
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
1000 Ashland Drive
Russell, Kentucky 41169
Telephone Number: (606) 329-3333
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, 1997, there were 65,032,263 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 SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended
December 31
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(In millions except per share data) 1996 1995
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REVENUES
Sales and operating revenues (including excise taxes) $ 3,427 $ 3,079
Other 19 94 (1)
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3,446 3,173
COSTS AND EXPENSES
Cost of sales and operating expenses 2,671 2,350
Excise taxes on products and merchandise 250 238
Selling, general and administrative expenses 333 309
Depreciation, depletion and amortization 104 101
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3,358 2,998
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OPERATING INCOME 88 175
OTHER INCOME (EXPENSE)
Interest expense (net of interest income) (41) (43)
Equity income 8 4
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INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 55 136
Income taxes (15) (44)
Minority interest in earnings of subsidiaries (4) (5)
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NET INCOME 36 87 (1)
Dividends on convertible preferred stock (5) (5)
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INCOME AVAILABLE TO COMMON SHARES $ 31 $ 82
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EARNINGS PER SHARE - Note E
Primary $ .47 $ 1.29 (1)
Assuming full dilution $ .47 $ 1.16
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275
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(1) Includes a gain of $73 million ($48 million or 74 cents a share after
income taxes) resulting from the settlement of Ashland Exploration's
claims in the bankruptcy reorganization of Columbia Gas Transmission
and Columbia Gas Systems.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31 September 30 December 31
(In millions) 1996 1996 1995
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 50 $ 77 $ 62
Accounts receivable 1,753 1,693 1,591
Allowance for doubtful accounts (27) (27) (25)
Construction completed and in progress 18 50 26
Inventories - Note B 801 736 791
Deferred income taxes 105 112 89
Other current assets 123 99 105
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2,823 2,740 2,639
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates 158 157 147
Investments of captive insurance companies 182 178 200
Cost in excess of net assets of companies acquired 137 120 106
Other noncurrent assets 348 359 392
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825 814 845
PROPERTY, PLANT AND EQUIPMENT
Cost 7,450 7,374 7,125
Accumulated depreciation, depletion and amortization (3,736) (3,659) (3,574)
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3,714 3,715 3,551
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$ 7,362 $ 7,269 $ 7,035
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Debt due within one year $ 185 $ 203 $ 279
Trade and other payables 2,032 2,044 1,741
Income taxes 27 32 75
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2,244 2,279 2,095
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,860 1,784 1,781
Employee benefit obligations 619 613 622
Reserves of captive insurance companies 162 166 177
Deferred income taxes 74 64 41
Other long-term liabilities and deferred credits 379 375 413
Commitments and contingencies - Note C
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3,094 3,002 3,034
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 176 174 178
STOCKHOLDERS' EQUITY
Convertible preferred stock 293 293 293
Common stockholders' equity 1,555 1,521 1,435
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1,848 1,814 1,728
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$ 7,362 $ 7,269 $ 7,035
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
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Loan to
leveraged
employee
stock
ownership
Common Paid-in Retained plan
(In millions) stock capital earnings (LESOP) Other Total
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BALANCE AT OCTOBER 1, 1995 $ 64 $ 256 $ 1,063 $ (11) $ (10) $ 1,362
Net income 87 87
Dividends
Preferred stock (5) (5)
Common stock (17) (17)
Issued common stock under stock
incentive plans 2 2
LESOP loan repayment 3 3
Other changes 3 3
-------- -------- --------- ----------- ------- ---------
BALANCE AT DECEMBER 31, 1995 $ 64 $ 258 $ 1,128 $ (8) $ (7) $ 1,435
======== ======== ========= =========== ======= =========
BALANCE AT OCTOBER 1, 1996 $ 64 $ 280 $ 1,185 $ - $ (8) $ 1,521
Net income 36 36
Dividends
Preferred stock (5) (5)
Common stock (18) (18)
Issued common stock under
Stock incentive plans 1 18 19
Employee savings plan 1 1
Other changes 1 1
-------- -------- --------- ----------- ------- ---------
BALANCE AT DECEMBER 31, 1996 $ 65 $ 299 $ 1,198 $ - $ (7) $ 1,555
======== ======== ========= =========== ======= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Three months ended
December 31
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(In millions) 1996 1995
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CASH FLOWS FROM OPERATIONS
Net income $ 36 $ 87
Expense (income) not affecting cash
Depreciation, depletion and amortization 104 101
Deferred income taxes 14 (9)
Other noncash items 9 10
Change in operating assets and liabilities (1) (112) (27)
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51 162
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 87 1
Proceeds from issuance of capital stock 12 1
Loan repayment from leveraged employee stock ownership plan - 3
Repayment of long-term debt (47) (16)
Increase (decrease) in short-term debt 18 (25)
Dividends paid (23) (23)
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47 (59)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (97) (74)
Purchase of operations - net of cash acquired (31) (17)
Proceeds from sale of operations - 1
Investment purchases (2) (37) (117)
Investment sales and maturities (2) 37 114
Other-net 3 -
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(125) (93)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27) 10
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 77 52
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 50 $ 62
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(1) Excludes changes resulting from operations acquired or sold.
(2) Represents primarily investment transactions of captive insurance companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - GENERAL
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, but 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, 1996. Results of operations for
the period ended December 31, 1996, are not necessarily indicative
of results to be expected for the year ending September 30, 1997.
NOTE B - INVENTORIES
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December 31 September 30 December 31
(In millions) 1996 1996 1995
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Crude oil $ 384 $ 336 $ 318
Petroleum products 375 323 331
Chemicals 376 342 332
Other products 151 146 173
Materials and supplies 64 63 69
Excess of replacement costs over LIFO carrying values (549) (474) (432)
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$ 801 $ 736 $ 791
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NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES
Federal, state and local statutes and regulations relating to the
protection of the environment have a significant impact on the
conduct of Ashland's businesses. For information regarding
environmental expenditures and reserves, see the "Miscellaneous -
Governmental Regulation and Action - Environmental Protection"
section of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties
which 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. As a result, charges to income for environmental
liabilities could have a material effect on results of operations
in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are
identified. However, such charges are not expected to have a
material adverse effect on Ashland's consolidated financial
position.
Ashland has numerous insurance policies that provide coverage at
various levels for environmental costs. In addition, various costs
of remediation efforts related to underground storage tanks are
eligible for reimbursement from state administered funds.
During 1996, the U.S. Environmental Protection Agency (EPA)
notified Ashland that its three refineries would be subject to a
comprehensive inspection of compliance with federal environmental
laws and regulations. The third and final inspection was completed
during the quarter ended December 31, 1996. Such inspections could
result in sanctions, monetary penalties and further remedial
expenditures. Also during 1996, Ashland arranged for an
independent review of environmental compliance at its three
refineries by an outside consulting firm, self-reported to the EPA
a number of issues of non-compliance with applicable laws or
regulations, and commenced a program to address these matters.
Ashland is not in a position to determine what actions, if any,
may be instituted and is similarly
6
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
uncertain at this time what additional remedial actions may be
required or costs incurred. However, this matter is not expected
to have a material adverse effect on Ashland's consolidated
financial position.
In addition to environmental matters, Ashland and its subsidiaries
are parties to numerous 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.
Although any actual liability is not determinable as of December
31, 1996, Ashland believes that any liability resulting from these
matters, after taking into consideration Ashland's insurance
coverages and amounts already provided for, should not have a
material adverse effect on Ashland's consolidated financial
position.
NOTE D - ACQUISITIONS
During the three months ended December 31, 1996, Ashland Chemical
acquired various distribution and specialty chemical businesses.
These acquisitions were accounted for as purchases and did not
have a significant effect on Ashland's consolidated financial
statements.
NOTE E - COMPUTATION OF EARNINGS PER SHARE
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Three months ended
December 31
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(In millions except per share data) 1996 1995
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PRIMARY EARNINGS PER SHARE
Income available to common shares
Net income $ 36 $ 87
Dividends on convertible preferred stock (5) (5)
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$ 31 $ 82
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Average common shares and equivalents outstanding
Average common shares outstanding 65 64
Common shares issuable upon exercise of stock options 1 -
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66 64
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Earnings per share $ .47 $ 1.29
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EARNINGS PER SHARE
ASSUMING FULL DILUTION
Income available to common shares
Net income $ 36 $ 87
Dividends on convertible preferred stock (5) -
Interest on convertible debentures (net of income taxes) - 1
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$ 31 $ 88
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Average common shares and equivalents outstanding
Average common shares outstanding 65 64
Common shares issuable upon
Exercise of stock options 1 -
Conversion of debentures - 3
Conversion of preferred stock - 9
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66 76
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Earnings per share $ .47 $ 1.16
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7
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended
December 31
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(Dollars in millions except as noted) 1996 1995
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SALES AND OPERATING REVENUES
Refining and Marketing (1) $ 1,751 $ 1,444
Valvoline 263 275
Chemical 958 886
APAC 305 328
Coal 150 164
Exploration 78 56
Intersegment sales (78) (74)
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$ 3,427 $ 3,079
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OPERATING INCOME
Refining and Marketing (1) $ 14 $ 29
Valvoline 13 12
Chemical 34 38
APAC 18 23
Coal 11 17
Exploration 12 79
General corporate expenses (14) (23)
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$ 88 $ 175
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EQUITY INCOME
Arch Mineral Corporation $ 5 $ 2
Other 3 2
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$ 8 $ 4
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OPERATING INFORMATION
Refining and Marketing (1)
Refining inputs (thousand barrels per day) (2) 372.8 378.2
Value of products manufactured per barrel $ 28.82 $ 22.05
Input cost per barrel 24.76 18.00
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Refining margin per barrel $ 4.06 4.05
Refined product sales (thousand barrels per day)
Wholesale sales to
Ashland brand retail jobbers 24.2 12.7
Other wholesale customers (3) 301.9 303.9
SuperAmerica retail system 76.5 75.3
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Total refined product sales 402.6 391.9
SuperAmerica merchandise sales $ 144 $ 139
Valvoline lubricant sales (thousand barrels per day) (3) 18.1 20.3
APAC construction backlog
At end of period $ 564 $ 616
Decrease during period $ (83) $ (56)
Ashland Coal, Inc. (4)
Tons sold (millions) 5.8 6.0
Sales price per ton $ 25.63 $ 27.32
Arch Mineral Corporation (4)
Tons sold (millions) 7.8 6.9
Sales price per ton $ 25.00 $ 25.85
Exploration
Net daily production
Natural gas (million cubic feet) (3) 105.8 111.0
Nigerian crude oil (thousand barrels) 17.6 18.2
Sales price
Natural gas (per thousand cubic feet) $ 3.07 $ 2.18
Nigerian crude oil (per barrel) $ 23.23 $ 16.21
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(1) Segments formerly identified as Petroleum and SuperAmerica have been
combined effective October 1, 1996. Prior year amounts have been restated.
(2) Includes crude oil and other purchased feedstocks.
(3) Includes intersegment sales.
(4) Ashland's ownership interest is 57% in Ashland Coal and 50% in Arch
Mineral.
8
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
Ashland recorded net income of $36 million for the quarter ended
December 31, 1996, the first quarter of its 1997 fiscal year. This
compares to net income of $87 million for the quarter a year ago,
which included operating income of $73 million ($48 million after
income taxes) from the settlement of Ashland Exploration's claims
in the bankruptcy reorganization of Columbia Gas Transmission and
Columbia Gas Systems. Excluding the non-recurring gain in the
quarter a year ago, net income declined slightly from prior-year
levels, due primarily to lower results from Refining and
Marketing, Ashland Coal and APAC.
Effective October 1, 1996, Ashland changed its methodology for
allocating corporate general and administrative (G&A) expenses.
For purposes of comparison to prior year results, segment
operating income for the current quarter (as reflected in the
table on Page 8), excluding the increased allocations, would have
amounted to: Refining and Marketing ($19 million); Valvoline ($15
million); Chemical ($36 million); APAC ($19 million); Coal ($11
million); Exploration ($13 million); and general corporate
expenses ($25 million).
Refining and Marketing
Ashland is now reporting the results of Ashland Petroleum, its
refining division, and SuperAmerica retail gasoline marketing
operations as a single industry segment to allow for better peer
group comparisons. Prior year results have been restated. Combined
results from these operations totaled $14 million for the current
quarter, compared to $29 million for the quarter a year ago. The
decline in earnings reflected reduced crude oil gathering margins
for Scurlock Permian, a 1.5(cent) per gallon decrease in retail
gasoline margins and increased corporate G&A allocations. Refining
operations showed an improvement over the prior year's quarter.
The refining margin (the difference between the value of products
manufactured and input cost) of $4.06 per barrel was essentially
flat with the margin of $4.05 per barrel for the first quarter of
fiscal 1996, even though input costs increased $6.76 per barrel.
Total inputs were down slightly from the first quarter of fiscal
1996 when throughput records were set at each of the three
refineries. Cost reduction efforts are ongoing as evidenced by a
decline in refining expenses of 16(cent) a barrel compared to last
year's quarter, despite an 11(cent) per barrel increase in the
cost of fuel consumed in the refining process.
The Ashland brand jobber program continues to expand with the
opening of 38 more units during the quarter, bringing the total
number of units to 523 at December 31, 1996, compared to 210 at
December 31, 1995. SuperAmerica continued its expansion during the
quarter also, opening 11 new or rebuilt units to bring the total
number of units to 750 at December 31, 1996, including 629
SuperAmerica stores and 121 Rich outlets. At December 31, 1995,
there were 616 SuperAmerica stores and 99 Rich outlets in
operation. The growth in operating units contributed to increased
sales volumes for both liquid products and merchandise, and the
merchandise gross profit margin remained strong during the
quarter. However, these positive trends only partially offset the
impact of the decline in retail gasoline margins and a rise in
operating expenses, associated with the growth in stores.
Valvoline
Valvoline reported operating income of $13 million for the quarter
ended December 31, 1996, compared to $12 million for the quarter
ended December 31, 1995. The U.S. lubricant business was the
leading contributor to earnings, reflecting improved motor oil
margins. Operating income from the automotive chemicals and
coolant businesses increased, reflecting higher margins, while the
antifreeze business benefited from improved volumes and margins.
First Recovery, Valvoline's used oil collection business, reported
a record quarter primarily due to higher used oil and filter
collection revenues. Valvoline International's operating income
was up on the strength of increased sales volumes.
9
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Chemical
Ashland Chemical was the leading earnings contributor to the
quarter, with $34 million of operating income, compared to $38
million for the same period a year ago. Both the distribution and
specialty chemical groups reported record first quarter results.
The General Polymers plastics distribution business, as well as
the electronic chemicals and specialty polymers and adhesives
businesses all reported record results for the quarter. However,
these improvements were more than offset by increased corporate
G&A allocations and a decline in petrochemicals, resulting from
escalating costs for solvents.
APAC
The APAC construction companies reported operating income of $18
million for the first quarter, compared to $23 million for the
same period last year. Adverse weather conditions in several of
APAC's operating areas led to lower volumes. Revenues were off 7%
and production of construction materials was down. In addition,
last year's results benefited from a gain on the disposal of a
shell pit in Florida, while the current year was affected by
increased corporate G&A allocations. The construction backlog at
December 31, 1996, amounted to $564 million, compared to $616
million at December 31, 1995. Although down 8% from the prior year
level, the reduction is not expected to have a significant effect
on APAC's results for the remainder of fiscal 1997.
Coal
Operating income for Ashland Coal declined from $17 million for
the first quarter of fiscal 1996 to $11 million for the first
quarter of fiscal 1997. The decline was principally due to the
expiration of certain higher priced sales contracts at the end of
December 1995. Coal sales tonnage declined slightly, while the
average sales price was down $1.69 per ton. However, these adverse
effects were partially offset by a reduction in the average cost
per ton to record-low levels, due primarily to a dragline
relocation completed in August 1996. A second dragline relocation
was completed in early January 1997 and should further reduce
mining costs.
Exploration
Ashland Exploration reported operating income of $12 million for
the December 1996 quarter, compared to $79 million for the
December 1995 quarter. Excluding the previously mentioned $73
million Columbia Gas settlement from last year's results,
operating income doubled. An 89-cent per Mcf increase in the
average natural gas price was the largest contributor to the
improvement.
Natural gas production from Vermilion 410 in the Gulf of Mexico
began December 23 and by the end of December reached 16.5 million
cubic feet a day net to Ashland's interest. Maximum production
from the complex is expected to be reached in February when four
additional wells from Vermilion 389 reach full capacity. In
addition, Ashland's board approved the development plan for the
Okwori field offshore Nigeria, as did Ashland's partner TOTAL. The
next step is to obtain approval from the Nigerian National
Petroleum Company.
Ashland and Ashland Exploration recently reached an agreement in
principle to settle a number of lawsuits alleging damages
resulting from certain discontinued operations. The settlement
will result in a $7.5 million charge to operating income during
the March 1997 quarter.
General Corporate Expenses
General corporate expenses declined from $23 million in the prior
year's quarter to $14 million for the current quarter. However,
the current quarter includes $11 million in increased G&A
allocations to the operating divisions. Excluding the impact of
the increased allocations, the increase in general corporate
expenses from $23 million to $25 million reflected higher
consulting fees and deferred compensation expenses in the current
quarter.
10
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Other Income (Expense)
For the three months ended December 31, 1996, interest expense
(net of interest income) totaled $41 million, compared to $43
million for the December 1995 quarter. The decline reflected a
decrease in the average outstanding debt level during the current
period.
Equity income from Arch Mineral increased from $2 million for the
December 1995 quarter to $5 million for the December 1996 quarter.
The increase resulted from favorable mining conditions at Arch of
West Virginia, increased production and sales at Arch of Illinois,
and reduced SG&A and interest costs.
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. On February 3, 1997, Moody's Investors Service
lowered the rating on Ashland's senior debt from Baa1 to Baa2, a
level equivalent to the company's BBB senior debt rating from
Standard & Poor's. Ashland has a revolving credit agreement
providing for up to $320 million in borrowings, under which no
borrowings were outstanding at December 31, 1996. At that date,
Ashland Coal also had revolving credit agreements providing for up
to $500 million in borrowings, of which $15 million was in use.
Under a shelf registration, Ashland can issue an additional $220
million in medium-term notes should future opportunities or needs
arise. Ashland and Ashland Coal also have access to various
uncommitted lines of credit and commercial paper markets, under
which short-term notes of $120 million were outstanding at
December 31, 1996.
Cash flows from operations, a major source of Ashland's liquidity,
amounted to $51 million for the three months ended December 31,
1996, compared to $162 million for the three months ended December
31, 1995. This decrease was attributed primarily to the decreased
level of earnings, including the effect of the Columbia
settlement, and increased working capital requirements.
Working capital at December 31 1996, was $579 million, compared to
$461 million at September 30, 1996, and $544 million at December
31, 1995. Liquid assets (cash, cash equivalents and accounts
receivable) amounted to 79% of current liabilities at December 31,
1996, and 76% at September 30, 1996. Ashland's working capital is
significantly affected by its use of the LIFO method of inventory
valuation, which valued inventories $549 million below their
replacement costs at December 31, 1996.
Capital Resources
For the three months ended December 31, 1996, property additions
amounted to $97 million, compared to $74 million for the same
period last year. Property additions (including exploration costs
and geophysical expenses) and cash dividends for the remainder of
fiscal 1997 are estimated at $421 million and $67 million,
respectively. Ashland anticipates meeting its remaining 1997
capital requirements for property additions and dividends from
internally generated funds. However, external financing may be
necessary to provide funds for the remaining contractual
maturities of $39 million for long-term debt or for acquisitions.
Ashland's capital employed at December 31, 1996, consisted of debt
(49%), deferred income taxes (2%), minority interest (4%),
convertible preferred stock (7%), and common stockholders' equity
(38%). Debt as a percent of capital employed was relatively
unchanged from the level at September 30, 1996. At December 31,
1996, long-term debt included $48 million of floating-rate debt,
and the interest rates on an additional $502 million of fixed-rate
debt had been converted to floating rates through interest rate
swap agreements. As a result, interest costs for the remainder of
1997 will fluctuate based on short-term interest rates on $550
million of Ashland's consolidated long-term debt, as well as on
any short-term notes and commercial paper.
11
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ----------------------------------------------------------------------------
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 the conduct of 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 in the petroleum, chemical
and extractive industries. For information on certain specific
environmental proceedings and investigations, see the "Legal
Proceedings" section of this Form 10-Q. For information regarding
environmental expenditures and reserves, see the "Miscellaneous -
Governmental Regulation and Action - Environmental Protection"
section of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties
which 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. As a result, charges to income for environmental
liabilities could have a material effect on results of operations
in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are
identified. However, such charges are not expected to have a
material adverse effect on Ashland's consolidated financial
position, cash flow or liquidity.
During 1996, the U.S. Environmental Protection Agency (EPA)
notified Ashland that its three refineries would be subject to a
comprehensive inspection of compliance with federal environmental
laws and regulations. The third and final inspection was completed
during the quarter ended December 31, 1996. Such inspections could
result in sanctions, monetary penalties and further remedial
expenditures. Also during 1996, Ashland arranged for an
independent review of environmental compliance at its three
refineries by an outside consulting firm, self-reported to the EPA
a number of issues of non-compliance with applicable laws or
regulations, and commenced a program to address these matters.
Ashland is not in a position to determine what actions, if any,
may be instituted and is similarly uncertain at this time what
additional remedial actions may be required or costs incurred.
However, this matter is not expected to have a material adverse
effect on Ashland's consolidated financial position.
PROFITABILITY IMPROVEMENT PLAN
On December 9, 1996, Ashland issued a press release announcing
several significant steps to improve the Company's profitability
and enhance returns to Ashland's shareholders. The press release
was attached as an exhibit to a Form 8-K filed with the Securities
and Exchange Commission on that same date. Following is an update
of the progress under each of the steps enumerated in the plan.
o ESTABLISHING A NEW PETROLEUM GROUP CONSISTING OF ASHLAND
PETROLEUM, SUPERAMERICA AND VALVOLINE. The group reports to
Group Operating Officer and Senior Vice President J. A.
"Fred" Brothers and is aggressively examining ways to improve
profits from the value-added chain.
o REDUCING CAPITAL EXPENDITURES FOR REFINING. These are being
limited to $100 million for fiscal 1997, below projected
depreciation, and totaled $21 million for the December 1996
quarter.
o AGGRESSIVELY REVIEWING OPTIONS FOR STRATEGIC ALLIANCES FOR
ASHLAND'S REFINING AND MARKETING OPERATIONS. Working with
outside advisors, a team of senior employees is continuing to
pursue this objective. It is too early to predict the outcome
of these efforts. However, Ashland remains committed to
actively pursuing this initiative to improve returns from
refining and marketing.
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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PROFITABILITY IMPROVEMENT PLAN (continued)
o EVALUATING STRATEGIC ALTERNATIVES FOR ASHLAND EXPLORATION,
INC. On January 29, 1997, Ashland's Board of Directors
approved, subject to certain contingencies, the initial
public offering (IPO) of less than 20 percent of Ashland
Exploration. This transaction would likely occur in the late
spring or summer and would likely be followed by the tax-free
spin-off of Ashland's remaining ownership in Ashland
Exploration to Ashland Inc. shareholders. Ashland hopes to
complete both transactions before the end of the 1997
calendar year, subject to governmental and regulatory
approvals, tax rulings, market conditions and definitive
agreements among various parties.
o INCREASING CAPITAL EMPLOYED IN ASHLAND CHEMICAL, THE APAC
HIGHWAY CONSTRUCTION GROUP AND VALVOLINE. Ashland Chemical
closed six acquisitions during the quarter as it continues to
expand distribution and specialty chemical businesses in the
United States and abroad. Ashland Chemical also announced a
115,000-square-foot expansion of its Dublin, Ohio, technical
center to provide technical support for continued growth.
Valvoline Instant Oil Change entered a retail partnership
with Sears to set up shop in 20 Sears Auto Centers in Dallas,
Minneapolis/St. Paul and Kansas City. The three markets will
serve as tests in anticipation of opening VIOC service
centers in more than 150 Sears Auto Centers nationwide over
the next three years.
o TERMINATING A SHELF REGISTRATION STATEMENT FOR THE OFFERING
FROM TIME TO TIME OF UP TO $100 MILLION IN ASHLAND COMMON
STOCK. This has been completed; Ashland issued a total of $51
million of common stock under the registration statement in
1995.
o IMPLEMENTING A COMMON STOCK REPURCHASE PROGRAM. In December,
Ashland's board approved a plan to repurchase up to one
million shares of Ashland common stock annually to offset
dilution due to company benefit programs. No purchases have
occurred to date under this program.
o EVALUATING CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES.
These expenses are being evaluated in a two phase program.
Phase one will result in the allocation of $41 million of
expenses during fiscal 1997 to the operating divisions which
are utilizing the services of the corporate staff. These
increased allocations began in the quarter ended December 31,
1996. Phase two is aimed at determining if expenditure levels
are appropriate and identifying specific cost reduction
opportunities. This process will continue throughout 1997 and
will be revisited from time to time thereafter.
In the same press release, Ashland also indicated that it would
continue to encourage the ongoing discussions between Ashland
Coal, Inc. and Arch Mineral Corporation toward a possible business
combination. On January 27, 1997, the Boards of Directors of the
two companies jointly announced that they had approved an
agreement in principle calling for the combination of the two
companies. The exchange ratio to be used for the transaction would
result in former Ashland Coal and Arch Mineral shareholders
holding approximately 48 percent and 52 percent of the combined
company, respectively. Consummation of the transaction is
conditioned upon the negotiation and execution of definitive
agreements between the parties, all necessary governmental and
regulatory consents and approvals by the shareholders of both
corporations. If the transaction is completed as currently
envisioned, Ashland would have an approximate 54 percent ownership
interest in the combined company, which would be consolidated in
Ashland's financial statements.
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. Although Ashland
believes that its expectations are based on reasonable
assumptions, it cannot assure that the expectations contained in
such statements will be achieved. Important factors which could
cause actual results to differ materially from those contained in
such statements are discussed in Note A to the Consolidated
13
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ----------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS (continued)
Financial Statements under risks and uncertainties in Ashland's
Annual Report for the fiscal year ended September 30, 1996. Other
factors and risks affecting Ashland's revenues and operations are
contained in Ashland's Form 10-K for the fiscal year ended
September 30, 1996, which is on file with the Securities and
Exchange Commission.
14
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings - (1) As of December 31, 1996, Ashland
was subject to 77 notices received from the USEPA and similar state
agencies identifying Ashland as a "potentially responsible party"
("PRP") under Superfund or similar state laws for potential joint
and several liability for cleanup costs in connection with alleged
releases of hazardous substances from various waste treatment or
disposal sites. These sites are currently subject to ongoing
investigation and remedial activities, overseen by the USEPA or a
state agency in accordance with procedures established under
regulations, in which Ashland may be participating as a member of
various PRP groups. Generally, the type of relief sought includes
remediation of contaminated soil and/or groundwater, reimbursement
for the costs of site cleanup or oversight expended, 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
established reserves, will not have a material adverse effect on
Ashland's consolidated financial position, cash flow or liquidity,
but could have a material adverse effect on results of operations
in a particular quarter or fiscal year. Estimated costs for these
matters are recognized in accordance with generally accepted
accounting principles governing probability and the ability to
reasonably estimate future costs. For additional information
regarding Superfund, see "Miscellaneous - Governmental Regulation
and Action-Environmental Protection."
(2) On March 19, 1996, after consultation with the USEPA, the
Kentucky Division for Air Quality issued a finding that Ashland had
not demonstrated compliance with certain air regulations regarding
volatile organic compounds at its Catlettsburg, Kentucky refinery,
and referred the matter to USEPA - Region IV for formal enforcement
action. Ashland filed a petition requesting a hearing before a
Kentucky administrative hearing officer on the merits of the
matter. The hearing is scheduled for July 1997. Separately, the
USEPA issued a Notice of Violation to Ashland regarding this
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Ashland's Annual Meeting of Shareholders was held on January 30,
1997, at the Ashland Petroleum Executive Office Building, Ashland
Drive, Russell, Kentucky at 10:30 a.m.
(b) Ashland's shareholders at said meeting elected 6 directors:
Votes
-------
Affirmative Withheld
----------- --------
Paul W. Chellgren 56,125,726 901,515
Ralph E. Gomory 56,102,830 871,824
Patrick F. Noonan 56,137,625 866,648
Jane C. Pfeiffer 56,097,123 879,041
Michael D. Rose 56,157,026 852,740
Robert B. Stobaugh 56,139,934 868,049
Directors who continued in office: Jack S. Blanton, Thomas E.
Bolger, Samuel C. Butler, Frank C. Carlucci, James B. Farley,
Mannie L. Jackson and W. L. Rouse, Jr. John R. Hall, a director of
Ashland since 1968 and Chairman of the Board since 1981 retired at
the Annual Meeting. Edmund B. Fitzgerald and James R. Rinehart,
directors of Ashland since 1990 and 1985, respectively, also
retired at the Annual Meeting.
15
(c) Ashland's shareholders at said meeting ratified the appointment of
Ernst & Young LLP as independent auditors for fiscal year 1997 by a
vote of 55,970,001 affirmative to 807,455 negative and 219,568
abstention votes.
(d) Ashland's shareholders at said meeting approved the Ashland Inc.
1997 Stock Incentive Plan by a vote of 51,930,344 affirmative to
4,239,248 negative and 508,466 abstention votes. A copy of the Plan
is attached as Exhibit 10.
(e) The results of voting on a shareholder proposal to nominate a wage
roll employee to the Board of Directors were 48,391,472 negative to
3,008,928 affirmative and 1,142,319 abstention votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.2 Bylaws of Ashland, as amended to January 30, 1997
10.18 Copy of Ashland Inc. 1997 Stock Incentive Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated December 9, 1996 was filed by Ashland to
disclose that Ashland issued a press release announcing several
significant steps to improve Ashland's profitability and enhance
returns to Ashland's shareholders. Ashland also announced that
Providence Capital, which had proposed nominating three directors
to Ashland's board at Ashland's annual shareholders' meeting had
agreed to withdraw its nominations.
A report on Form 8-K dated January 30, 1997 was filed to disclose
that on January 30, 1997, the Board of Directors of Ashland Inc.
announced that Ashland will proceed toward an initial public
offering of less than 20 percent of Ashland Exploration, Inc., a
wholly-owned subsidiary, subject to certain contingencies. This
transaction would likely occur in the late spring or summer. The
initial public offering would likely be followed by the tax-free
spin-off of Ashland's remaining ownership in Ashland Exploration to
Ashland Inc. shareholders once an appropriate ruling is received
from the Internal Revenue Service, subject also to any governmental
and regulatory approvals, market conditions and definitive
agreements among various parties.
16
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, 1997 /s/ Kenneth L. Aulen
-------------------------------------------
Kenneth L. Aulen
Administrative Vice President and Controller
(Chief Accounting Officer)
Date February 13, 1997 /s/ Thomas L. Feazell
-------------------------------------------
Thomas L. Feazell
Senior Vice President,
General Counsel and Secretary
17