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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, 1997
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, 1998, there were 75,272,427 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
---------------------------
(In millions except per share data) 1997 1996
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REVENUES
Sales and operating revenues (including excise taxes) $ 3,550 $ 3,545
Equity income (1) 3 3
Other 52 28
--------- ---------
3,605 3,576
COSTS AND EXPENSES
Cost of sales and operating expenses 2,755 2,765
Excise taxes on products and merchandise 254 250
Selling, general and administrative expenses 339 334
Depreciation, depletion and amortization 125 135
--------- ---------
3,473 3,484
--------- ---------
OPERATING INCOME 132 92
Interest expense (net of interest income) (31) (44)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME --------- ---------
TAXES AND MINORITY INTEREST 101 48
Income taxes (39) (15)
Minority interest in earnings of subsidiaries (10) (9)
--------- ---------
INCOME FROM CONTINUING OPERATIONS 52 24
Income from discontinued operations - 12
--------- ---------
NET INCOME 52 36
Dividends on convertible preferred stock - (5)
--------- ---------
NET INCOME AVAILABLE TO COMMON SHARES $ 52 $ 31
========= =========
EARNINGS PER SHARE - Note F
Basic
Income from continuing operations $ .69 $ .30
Income from discontinued operations - .18
--------- ---------
Net Income $ .69 $ .48
========= =========
Diluted
Income from continuing operations $ .68 $ .30
Income from discontinued operations - .17
--------- ---------
Net Income $ .68 $ .47
========= =========
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275
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(1) Due to the adoption of FAS 131, "Disclosures about Segments of an
Enterprise and Related Information," effective October 1, 1997, equity
income is now included in operating income, with prior periods
restated.
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) 1997 1997 1996
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70 $ 268 $ 79
Accounts receivable 1,702 1,754 1,790
Allowance for doubtful accounts (23) (24) (27)
Inventories - Note A 770 729 811
Other current assets 251 268 264
--------- --------- ---------
2,770 2,995 2,917
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates 75 86 84
Investments of captive insurance companies 94 189 182
Cost in excess of net assets of companies acquired 127 120 137
Coal supply agreements 185 195 125
Net assets of discontinued operations held for sale 32 18 366
Other noncurrent assets 276 283 319
--------- --------- ---------
789 891 1,213
PROPERTY, PLANT AND EQUIPMENT
Cost 7,814 7,471 7,527
Accumulated depreciation, depletion and amortization (3,652) (3,580) (3,666)
--------- --------- ---------
4,162 3,891 3,861
--------- --------- ---------
$ 7,721 $ 7,777 $ 7,991
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt due within one year $ 222 $ 93 $ 170
Trade and other payables 1,915 2,045 2,103
Income taxes 58 123 38
--------- --------- ---------
2,195 2,261 2,311
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,577 1,639 2,087
Employee benefit obligations 890 854 863
Reserves of captive insurance companies 175 161 162
Other long-term liabilities and deferred credits 549 565 479
Commitments and contingencies - Note E
--------- --------- ---------
3,191 3,219 3,591
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 279 273 241
STOCKHOLDERS' EQUITY
Convertible preferred stock - - 293
Common stockholders' equity 2,056 2,024 1,555
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2,056 2,024 1,848
--------- --------- ---------
$ 7,721 $ 7,777 $ 7,991
========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
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Preferred Common Paid-in Retained
(In millions) stock stock capital earnings Other Total
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BALANCE AT OCTOBER 1, 1996 $ 293 $ 64 $ 280 $ 1,185 $ (8) $ 1,814
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 $ 293 $ 65 $ 299 $ 1,198 $ (7) $ 1,848
====== ======== ======= ========= ======= =======
BALANCE AT OCTOBER 1, 1997 $ - $ 75 $ 605 $ 1,379 $ (35) $ 2,024
Net income 52 52
Dividends on common stock (21) (21)
Issued common stock under
Stock incentive plans 4 4
Acquisition of operations
of other companies 1 1 2
Other changes (1) (4) (5)
------ -------- ------- --------- ------- -------
BALANCE AT DECEMBER 31, 1997 $ - $ 75 $ 609 $ 1,411 $ (39) $ 2,056
====== ======== ======= ========= ======= =======
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
--------------------------------
(In millions) 1997 1996
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CASH FLOWS FROM CONTINUING OPERATIONS
Income from continuing operations $ 52 $ 24
Expense (income) not affecting cash
Depreciation, depletion and amortization 125 135
Deferred income taxes 16 11
Other noncash items 3 12
Change in operating assets and liabilities (1) (199) (91)
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(3) 91
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt - 87
Proceeds from issuance of capital stock 2 12
Repayment of long-term debt (63) (80)
Increase in short-term debt 127 28
Dividends paid (23) (23)
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43 24
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (350)(2) (94)
Purchase of operations - net of cash acquired (20) (31)
Proceeds from sale of operations 26 -
Investment purchases (3) (103) (37)
Investment sales and maturities (3) 199 37
Other - net 10 3
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(238) (122)
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CASH USED BY CONTINUING OPERATIONS (198) (7)
Cash used by discontinued operations - (18)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (198) (25)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 268 104(4)
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 70 $ 79
======== ========
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(1) Excludes changes resulting from operations acquired or sold.
(2) Includes $228 million from purchases of leased assets associated with
the formation of Marathon Ashland Petroleum LLC.
(3) Represents primarily investment transactions of captive insurance
companies.
(4) Includes $27 million of cash and cash equivalents of Arch Mineral
Corporation that was presented on a consolidated basis effective
October 1, 1996.
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 - 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, 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, 1997. Results of operations for
the period ended December 31, 1997, are not necessarily indicative
of results to be expected for the year ending September 30, 1998.
Inventories
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December 31 September 30 December 31
(In millions) 1997 1997 1996
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Crude oil $ 262 $ 277 $ 367
Petroleum products 319 289 375
Chemicals 381 341 376
Other products 153 174 172
Materials and supplies 66 64 70
Excess of replacement costs over LIFO carrying values (411) (416) (549)
------- ------ ------
$ 770 $ 729 $ 811
======= ====== ======
NOTE B - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
In addition to the restatement for discontinued operations
described in Note C, the financial statements and information by
industry segment for the period ended December 31, 1996, have been
restated for three other items. None of these restatements had any
impact on net income or earnings per share.
Ashland Coal, Inc. and Arch Mineral Corporation merged on July 1,
1997, into a new corporation known as Arch Coal, Inc., in which
Ashland has a 54% ownership interest. Beginning in the September
1997 quarter, Arch Coal was consolidated in Ashland's financial
statements. Prior interim quarters in fiscal 1997 were restated to
reflect Arch Mineral on a consolidated basis for comparison
purposes. Arch Mineral was previously accounted for on the equity
method.
Effective October 1, 1997, Ashland adopted FAS 131, "Disclosures
about Segments of an Enterprise and Related Information." As a
result of the adoption of FAS 131, Ashland redefined operating
income to now include equity income and restated prior periods for
comparison purposes.
Effective October 1, 1997, responsibility for marketing of the
petrochemicals and lube base stocks manufactured by Ashland
Petroleum was transferred from Chemical and Valvoline,
respectively, to Refining and Marketing. Information by industry
segment for prior periods was restated to reflect the transfer.
6
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - DISCONTINUED OPERATIONS
On July 1, 1997, Ashland sold the domestic exploration and
production operations of Blazer Energy Corporation. Ashland
continues to pursue the sale of its exploration and production
operations in Nigeria. Accordingly, results from the Exploration
segment are shown as discontinued operations with prior periods
restated. Components of amounts reflected in the income
statements, balance sheets and cash flow statements are presented
in the following table.
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Three months ended
December 31
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(In millions) 1997 1996
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INCOME STATEMENT DATA
Revenues $ - $ 80
Costs and expenses - (68)
--------- ---------
Operating income - 12
Income tax benefit (expense) - -
--------- ---------
Net income $ - $ 12
========= ==========
BALANCE SHEET DATA
Current assets $ 87 $ 74
Investments and other assets 1 2
Property, plant and equipment - net 55 434
Current liabilities (47) (53)
Noncurrent liabilities (64) (91)
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Net assets held for sale $ 32 $ 366
========= =========
CASH FLOW DATA
Cash flows from operations $ - $ (6)
Cash flows from investment - (12)
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Cash used by discontinued operations $ - $ (18)
========= =========
NOTE D - ACQUISITIONS
During the three months ended December 31, 1997, Ashland Chemical
made two acquisitions to expand its distribution businesses and
APAC acquired three construction businesses. One of the APAC
acquisitions was accounted for as a pooling, but prior periods
were not restated since the effects would have been insignificant.
The other acquisitions were accounted for as purchases and did not
have a significant effect on Ashland's consolidated financial
statements.
NOTE E - 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 operating facilities,
previously owned or operated facilities, and Superfund or other
waste sites. 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
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.
7
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE E - LITIGATION, CLAIMS AND CONTINGENCIES
During 1997, the U.S. Environmental Protection Agency (EPA)
completed comprehensive inspections of three refineries owned by
Ashland prior to the formation of Marathon Ashland Petroleum LLC
(MAP), which evaluated Ashland's compliance with federal
environmental laws and regulations at those facilities. Under the
terms of the agreements pursuant to which the refineries were
conveyed to MAP, Ashland agreed to retain responsibility for
matters arising out of these inspections, including commencement
of work as soon as practical on certain enumerated projects.
Ashland continues to cooperate and participate in discussions with
the EPA concerning the results of these inspections, including
discussions about the nature and extent of any additional
remediation actions or equipment modifications or upgrades that
may be required to respond to the findings of the inspections.
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.
Ashland does not believe that any liability resulting from these
matters, after taking into consideration its insurance coverages
and amounts already provided for, will have a material adverse
effect on its consolidated financial position.
NOTE F - COMPUTATION OF EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (FAS 128), "Earnings per
Share." FAS 128 replaced the previously reported primary and fully
diluted earnings per share (EPS) with basic and diluted EPS.
Unlike primary EPS, basic EPS excludes any dilutive effects of
options and convertible securities. Diluted EPS is very similar to
the previously reported fully diluted EPS. EPS amounts for all
periods have been presented, and where necessary, restated to
conform to the FAS 128 requirements.
The following table sets forth the computation of basic and
diluted EPS from continuing operations. Common shares issuable
upon conversion of convertible preferred stock and convertible
debentures which were outstanding during the quarter ended
December 31, 1996, were not included in the computation of diluted
EPS because the effect would be antidilutive.
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Three months ended
December 31
-----------------------
(In millions except per share data) 1997 1996
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NUMERATOR
Income from continuing operations $ 52 $ 24
Preferred stock dividends - (5)
-------- --------
Numerator for basic and diluted EPS -
Income available to common shares $ 52 $ 19
======== ========
DENOMINATOR
Denominator for basic EPS - Weighted-average
common shares outstanding 75 65
Common shares issuable upon exercise of stock options 1 1
-------- --------
Denominator for diluted EPS - Adjusted weighted-average
shares and assumed conversions 76 66
======== ========
BASIC EPS FROM CONTINUING OPERATIONS $ .69 $ .30
======== ========
DILUTED EPS FROM CONTINUING OPERATIONS $ .68 $ .30
======== ========
8
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE G - REFINING AND MARKETING JOINT VENTURE
Effective January 1, 1998, Ashland and Marathon Oil Company
completed a transaction to form Marathon Ashland Petroleum LLC
(MAP), which combines the refining, marketing and transportation
operations of the two companies. Marathon has a 62 percent
interest in the new company and Ashland holds a 38 percent
interest. Ashland will account for its investment in the new
company using the equity method of accounting. However, since the
transaction did not close until January 1, 1998, Ashland continued
to report its 100 percent ownership interest in the Ashland
Petroleum and SuperAmerica divisions (Ashland's Refining and
Marketing segment) on a consolidated basis in its financial
statements for the quarter ended December 31, 1997.
Ashland's condensed financial statements included in its Quarterly
Report on Form 10-Q for the quarter ending March 31, 1998, will
reflect the change in accounting method for its businesses
contributed to MAP, retroactive to October 1, 1997, the beginning
of Ashland's current fiscal year. Although the change to the
equity method of accounting would have no effect on net income or
stockholders' equity through December 31, 1997, it would reduce
Ashland's consolidated assets, liabilities, revenues and costs and
change certain components of cash flow. The following tables
summarize the estimated impact on Ashland's financial statements
for the three months ended December 31, 1997.
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Three months ended
December 31, 1997
-----------------------------------
(In millions) As Reported Equity Method
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(estimated)
INCOME STATEMENT DATA
Revenues $ 3,605 $ 2,005
Costs and expenses (3,473) (1,873)
------------- ---------------
Operating income 132 132
Interest, taxes and minority interest (80) (80)
------------- ---------------
Net Income $ 52 $ 52
============= ===============
BALANCE SHEET DATA
Current assets $ 2,770 $ 1,901
Investments and other assets 789 2,657
Property, plant and equipment 4,162 2,230
------------- ---------------
Total assets $ 7,721 $ 6,788
============= ===============
Current liabilities $ 2,195 $ 1,424
Noncurrent liabilities 3,191 3,029
Minority interest in consolidated subsidiaries 279 279
Stockholders' equity 2,056 2,056
------------- ---------------
Total liabilities and stockholders' equity $ 7,721 $ 6,788
============= ===============
CASH FLOW DATA
Cash flows from continuing operations $ (3) $ (46)
Cash flows from financing 43 43
Cash flows from investment (238) (195)
------------- ---------------
Decrease in cash and cash equivalents $ (198) $ (198)
============= ===============
Ashland filed a Form 8-K on January 16, 1998, describing the
formation of MAP. Financial statements required with such filing
were not available at that time, but will be included with a Form
8-K/A to be filed by March 17, 1998.
9
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended
December 31
-----------------------------
(Dollars in millions except as noted) 1997 1996 (1)
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SALES AND OPERATING REVENUES
Refining and Marketing $ 1,667 $ 1,777
Valvoline 254 250
Chemical 1,014 928
APAC 337 305
Coal 329 345
Intersegment sales
Refining and Marketing (44) (52)
Other (7) (8)
---------- ----------
$ 3,550 $ 3,545
========== ==========
OPERATING INCOME (2)
Refining and Marketing $ 36 $ 16
Valvoline 11 13
Chemical 53 35
APAC 19 18
Coal 29 25
General corporate expenses (16) (15)
---------- ----------
$ 132 $ 92
========== ==========
OPERATING INFORMATION
Refining and Marketing
Refining inputs (thousand barrels per day) (3) 367.2 372.8
Value of products manufactured per barrel $ 23.96 $ 28.82
Input cost per barrel 19.47 24.76
---------- ----------
Refining margin per barrel $ 4.49 $ 4.06
Refined product sales (thousand barrels per day)
Wholesale sales to
Ashland brand retail jobbers 22.3 24.2
Other wholesale customers (4) 300.4 301.9
SuperAmerica retail system 78.6 76.5
---------- ----------
Total refined product sales 401.3 402.6
SuperAmerica merchandise sales $ 152 $ 144
Valvoline lubricant sales (thousand barrels per day) (4) 15.6 14.5
APAC construction backlog
At end of period $ 651 $ 564
Decrease during period $ (42) $ (83)
Coal (5)
Tons sold (millions) 12.8 13.6
Sales price per ton $ 25.68 $ 25.33
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(1) Effective October 1, 1997, responsibility for marketing of the
petrochemicals and lube base stocks manufactured by Ashland Petroleum
was transferred from Chemical and Valvoline, respectively, to Refining
and Marketing. Information by industry segment for prior periods has
been restated to reflect the transfer.
(2) Due to the adoption of FAS 131, "Disclosures about Segments of an
Enterprise and Related Information," effective October 1, 1997, equity
income is now included in operating income, with prior periods
restated.
(3) Includes crude oil and other feedstocks.
(4) Includes intersegment sales.
(5) Amounts are reported on a 100% basis. Ashland's ownership
interest is 54% in Arch Coal.
10
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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 $52 million for the quarter ended
December 31, 1997, the first quarter of its 1997 fiscal year,
which included an after-tax gain of $6 million on the sale of
Ashland's 23% interest in Melamine Chemicals. Net income excluding
the unusual gain totaled $46 million, compared to $36 million for
the same period last year. Although last year's first quarter also
included net income of $12 million from discontinued operations of
the former Exploration segment, results for this year's first
quarter were enhanced by lower net interest costs resulting from
the use of the sales proceeds to reduce debt and invest in
short-term securities. The improvement in earnings can be
attributed to a rebound from Refining and Marketing operations and
a solid performance by all business units.
Results for the three months ended December 31, 1996, have been
restated for a variety of reasons as described in Notes B and C to
the condensed consolidated financial statements on Pages 6 and 7.
These restatements present the results for the prior year's period
on a basis consistent with the current year's presentation and all
comparisons within this discussion reflect these restatements.
Refining and Marketing
Operating income from Refining and Marketing more than doubled to
$36 million for the quarter ended December 31, 1997, compared to
$16 million for the quarter ended December 31, 1996. This increase
was achieved despite extremely volatile crude oil markets. Early
in the quarter, crude oil prices rose rapidly as the market
reacted to uncertainty over Iraqi oil exports. By quarter's end,
crude oil prices were falling as tensions eased and OPEC increased
its production ceiling to 27.5 million barrels per day. The net
impact on Ashland was lower average crude oil costs for the
quarter and improved refining margins, which were up $.43 per
barrel compared to the December 1996 quarter. Retail gasoline
margins also improved, and sales of gasoline and merchandise
increased due to the addition of 21 stores since December 1996. At
December 31, 1997, there were 771 retail outlets operating (647
SuperAmerica stores and 124 Rich outlets), compared to 750 at
December 31, 1996 (629 SuperAmerica stores and 121 Rich outlets).
Effective January 1, 1998, Ashland and Marathon Oil Company
completed a transaction to form Marathon Ashland Petroleum LLC
(MAP), which combines the refining, marketing and transportation
operations of the two companies. As described in Note G to the
condensed consolidated financial statements on Page 9, the
transaction will result in the restatement of Ashland's financial
statements for the quarter ended December 31, 1997. However, such
restatement will not affect operating income reported for the
Refining and Marketing segment.
Results for the December 1997 quarter include various income and
expense items, including severance costs, associated with the
formation of MAP, but the net effect of these items was not
significant. Potential efficiencies derived by MAP have been
broadly estimated to be in excess of $200 million annually on a
pretax basis. While a modest part of these efficiencies will be
achieved in mid-to-late calendar 1998, full realization of
efficiencies should occur over the next few years as MAP's
integration plans are implemented.
Valvoline
Valvoline reported operating income of $11 million for the quarter
ended December 31, 1997, compared to $13 million for the quarter
ended December 31, 1996. The decrease in earnings reflected lower
R-12 refrigerant sales volumes coupled with higher operating
expenses related to the roll-out of new services for First
Recovery, Valvoline's used oil collection business.
In February 1998, Valvoline completed the acquisition of
California-based Eagle One Industries. With a wide product
portfolio that includes waxes, polishes and cleaners, the Eagle
One acquisition fills Valvoline's need for a premium masterbrand
for "above the hood," or appearance, applications.
11
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
Chemical
Ashland Chemical was the leading earnings contributor to the
quarter, with $53 million of operating income, compared to $35
million for the same period a year ago. The current quarter
includes a pretax gain of $14 million on the sale of Ashland's 23%
interest in Melamine Chemicals. Excluding the gain, the
improvement in operating income reflects a record first quarter
performance from the specialty chemicals group and better results
from the petrochemicals group. Specialty chemicals benefited from
sales volume and margin improvements for foundry products. The
increase in petrochemicals reflected better margins for maleic
anhydride. Results for the distribution group were down slightly,
as margin declines in industrial chemicals and solvents were
largely offset by higher sales volumes in most of the other
businesses.
APAC
The APAC construction companies reported operating income of $19
million for the first quarter, compared to $18 million for the
same period last year. Net revenue (total revenue less subcontract
work) was up 12%, while hot mix asphalt production was up 7% and
crushed aggregate production was up 20%. The construction backlog
at December 31, 1997, amounted to $651 million (a record level for
December) and represented a 15% improvement over the level of
December 1996.
In February 1998, APAC completed the acquisition of 10
Missouri-based companies known as the Masters-Jackson group. This
is the largest acquisition for APAC in more than 10 years and
provides an opportunity to improve APAC's competitive position in
Missouri, Arkansas, Oklahoma and Kansas.
Coal
Arch Coal had a strong December quarter with operating income of
$29 million, compared to combined earnings of $25 million from
Arch Mineral and Ashland Coal for the same quarter last year. The
current quarter results benefited from a stronger performance by
the Lone Mountain mining complex and continued strength from the
Mingo Logan complex. Cost savings resulting from the July 1997
merger of Arch Mineral and Ashland Coal also contributed to higher
operating income.
In December 1997, a long-term coal supply contract priced well
above current open market prices expired. Arch expects to continue
to supply a significant amount of similar coal to the customer at
less favorable prices. In addition, another customer has informed
Arch that one of its plants will require substantially less coal
under an existing above-market contract. Arch is in discussions
with the customer to attempt to minimize the reductions.
General Corporate Expenses
General corporate expenses amounted to $16 million in the quarter
ended December 31, 1997, compared to $15 million for the quarter
ended December 31, 1996. The increase reflects higher incentive
compensation costs.
Interest expense (net of interest income)
For the three months ended December 31, 1997, interest expense
(net of interest income) totaled $31 million, compared to $44
million for the December 1996 quarter. The decline reflected a 25%
decrease in interest expense as a result of Ashland's improved
financial position. Ashland used the proceeds from the July 1997
sale of its domestic exploration and production operations to
significantly reduce its debt levels.
Discontinued operations
See Note C to the condensed consolidated financial statements on
Page 7 for a discussion of the discontinued operations of the
former Exploration segment.
12
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ASHLAND INC. AND 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 a revolving credit agreement providing for up
to $320 million in borrowings, under which no borrowings were
outstanding at December 31, 1997. At that date, Arch Coal also had
a revolving credit agreement providing for up to $500 million in
borrowings, of which $190 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 Arch Coal also have access to various uncommitted
lines of credit and commercial paper markets, under which
short-term notes of $163 million were outstanding at December 31,
1997.
Cash flows from continuing operations, a major source of Ashland's
liquidity, amounted to a deficit of $3 million for the three
months ended December 31, 1997, compared to $91 million for the
three months ended December 31, 1996. This decrease was due to
increased working capital requirements and the payment of income
taxes related to the sale of Ashland's domestic exploration and
production operations.
Operating working capital (accounts receivable and inventories,
less trade and other payables) at December 31 1997, was $534
million, compared to $414 million at September 30, 1997, and $471
million at December 31, 1996. Liquid assets (cash, cash
equivalents and accounts receivable) amounted to 80% of current
liabilities at December 31, 1997, and 88% at September 30, 1997.
Ashland's working capital is significantly affected by its use of
the LIFO method of inventory valuation, which valued inventories
$411 million below their replacement costs at December 31, 1997.
Capital Resources
For the three months ended December 31, 1997, property additions
amounted to $350 million, compared to $94 million for the same
period last year. The current quarter amount includes $228 million
from purchases of leased assets associated with the formation of
MAP. Property additions (excluding additions for MAP which will be
self-funded) and cash dividends for the remainder of fiscal 1998
are estimated at $325 million and $70 million, respectively.
Ashland anticipates meeting its remaining 1998 capital
requirements for property additions, dividends and $47 million in
contractual maturities of long-term debt from internally generated
funds. However, external financing may be necessary to provide
funds for acquisitions. On February 17, 1998, Ashland issued $150
million aggregate principal amount of 6.625% Senior Notes due
2008. The notes were sold to "qualified institutional buyers" in
reliance on Rule 144A under the Securities Act of 1933.
During January 1998, Ashland contributed an additional $104
million of assets to MAP. Such amount included $26 million of
leased assets which were purchased in January 1998, an additional
$42 million of assets on which the related lease obligations were
retained by Ashland, and cash contributions of $36 million. The
cash contributions resulted from capital expenditure levels during
the preceding calendar year being less than the projected levels
which were agreed upon in the formation of MAP.
Ashland's capital employed at December 31, 1997, consisted of debt
(43%), minority interest (7%) and common stockholders' equity
(50%). Debt as a percent of capital employed was relatively
unchanged from the level at September 30, 1997. At December 31,
1997, long-term debt included about $230 million of floating-rate
debt, and the interest rates on an additional $290 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 1998 will fluctuate based on short-term interest
rates on about $520 million of Ashland's consolidated long-term
debt, as well as on any short-term notes and commercial paper.
13
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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 increasingly stringent 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 in the chemical, mining and petroleum
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.
During 1997, the U.S. Environmental Protection Agency (EPA)
completed comprehensive inspections of three refineries owned by
Ashland prior to the formation of MAP. See Note E to the condensed
consolidated financial statements on Page 8 for a discussion of
this matter.
Ashland does not believe that any liability resulting from
environmental matters, after taking into consideration its
insurance coverages and amounts already provided for, will have a
material adverse effect on its consolidated financial position,
cash flows or liquidity.
YEAR 2000
Ashland began developing plans in 1994 to address the possible
exposures related to the impact of the Year 2000 on its computer
systems, as well as on the products and software it has purchased
from third parties. Most of Ashland's key financial, information
and operational systems have been assessed, and detailed plans
have been developed to address systems modifications or
replacements by December 31, 1999. Ashland is also communicating
with systems providers in an attempt to ensure that purchased
systems will handle the Year 2000 processing implications. Ashland
expects to successfully implement the systems and programming
changes necessary to address Year 2000 issues and believes that
the future costs of such changes (including replacements of
systems solely for Year 2000 concerns) are not expected to exceed
$10 million, which would not be material to Ashland's consolidated
financial position, results of operations or cash flows.
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
Financial Statements under risks and uncertainties in Ashland's
Annual Report for the fiscal year ended September 30, 1997. 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, 1997, which is on file with the Securities and
Exchange Commission.
14
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS (continued)
The above discussion under "Results of Operations - Refining and
Marketing" contains forward-looking statements with respect to the
amount and timing of efficiencies to be realized by MAP. Some
factors that could potentially cause actual results to differ
materially from present expectations include unanticipated costs
to implement shared technology, difficulties in integrating
corporate structures, delays in leveraging volume procurement
advantages or delays in personnel rationalization.
15
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - (1) As of December 31, 1997, Ashland had
been identified 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 in connection with 83 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 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. 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. For additional
information regarding Superfund, see the "Miscellaneous - Governmental
Regulation and Action-Environmental Protection" section of Ashland's Form
10-K.
(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 governing emissions of volatile
organic compounds ("VOC") at its Catlettsburg, Kentucky refinery, and
referred the matter to USEPA - Region IV for formal enforcement action. On
May 27, 1997, Kentucky and Ashland entered into an Agreed Order resolving
the issues in contention. Under the terms of the Agreed Order, Ashland
agreed to pay a civil penalty and to design, construct and install
additional VOC controls. Separately, the USEPA issued a Notice of Violation
to Ashland regarding this matter. In connection with the formation of MAP,
the Catlettsburg Refinery was conveyed to Catlettsburg Refinery, LLC, a
subsidiary of MAP. Under the terms of the agreements pursuant to which the
Catlettsburg Refinery was conveyed, Ashland agreed to retain responsibility
for matters arising out of the Agreed Order and Notice of Violation.
(3) In the fall of 1996, the USEPA conducted multimedia inspections of
Ashland's three refineries. Over the past several months, the USEPA and
Ashland have engaged in discussions to resolve the issues identified during
these inspections. The parties have reached a tentative agreement on many
major issues and have begun the process of drafting a settlement document.
Resolution is expected to involve both a penalty payment and environmental
projects. Ashland expects to finalize the settlement agreement in calendar
1998. In connection with the formation of MAP, the refineries were conveyed
to MAP (or a subsidiary of MAP). Under the terms of the agreements
conveying Ashland's three refineries to MAP, Ashland agreed to retain
responsibility for matters arising out of the multimedia inspections.
(4) On October 24, 1996, the rock strata overlaying an abandoned
underground mine adjacent to the coal-refuse impoundment used by an Arch
Coal subsidiary's preparation plant failed, resulting in an accidental
discharge of approximately 6.3 million gallons of water and fine coal
slurry into a tributary of the Powell River in Lee County, Virginia. As a
consequence, the Director of the State Water Control Board and the
Department of Mines, Minerals and Energy of the Commonwealth of Virginia
filed a suit in Lee County Virginia Circuit Court against the Arch Coal
subsidiary, Lone Mountain Processing, Inc., alleging violations of effluent
limitations and reporting violations under Lone Mountain's National
Pollutant Discharge Elimination System permits under the Clean Water Act.
The Commonwealth of Virginia agreed to vacate two notices of violation and
a show of cause order in exchange for Lone Mountain's payment to the
Commonwealth of a fine of approximately $1.4 million. A final order
effectuating the settlement was
16
entered as a judgment by the court on October 29, 1997. At the request of
the USEPA and the U.S. Fish & Wildlife Service, the United States Attorney
for the Western District of Virginia also has opened a criminal
investigation of the 1996 incident. Arch Coal is cooperating with the
investigation, the results of which are not expected until sometime in
calendar 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Ashland's Annual Meeting of Shareholders was held on January 29, 1998,
at the Ashland Petroleum Executive Office Building, Ashland Drive, Russell,
Kentucky at 10:30 a.m.
(b) At its Annual Meeting, Ashland's shareholders elected 2 directors to
serve a three-year term:
Votes
-----
Affirmative Withheld
----------- --------
Samuel C. Butler 66,519,424 976,950
Mannie L. Jackson 66,505,928 990,446
Directors who continued in office: Frank C. Carlucci, Paul W.
Chellgren, James B. Farley, Ralph E. Gomory, Patrick F. Noonan, Jane C.
Pfeiffer, Michael D. Rose and W. L. Rouse, Jr. Jack S. Blanton, Thomas E.
Bolger and Robert B. Stobaugh, directors of Ashland since 1988, 1987 and
1977, respectively, retired at the Annual Meeting.
(c) At its Annual Meeting, Ashland's shareholders ratified the appointment
of Ernst & Young LLP as independent auditors for fiscal year 1998 by a vote
of 66,646,555 affirmative to 635,596 negative and 214,221 abstention votes.
(d) At its Annual Meeting, Ashland's shareholders approved an amendment of
the Second Restated Articles of Incorporation of Ashland to increase the
number of shares of authorized Common Stock, par value $1.00, from
150,000,000 to 300,000,000 shares by a vote of 57,446,866 affirmative to
9,581,798 negative and 461,916 abstention votes. Passage of this amendment
required the vote of a majority of Ashland's shares eligible to vote.
(e) At its Annual Meeting, Ashland's shareholders rejected an amendment of
the Second Restated Articles of Incorporation of Ashland to provide for a
single class of directors, elected annually, by a vote of 39,531,416
affirmative to 11,135,680 negative and 12,241,261 abstention votes. Passage
of this amendment would have required the vote of 80% of Ashland's shares
eligible to vote.
(f) The results of voting on a shareholder proposal to nominate a wage roll
employee to the Board of Directors were 55,637,425 negative to 6,072,152
affirmative and 1,340,796 abstention votes.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 Second Restated Articles of Incorporation of Ashland, amended
January 30, 1998.
27 Financial Data Schedule
27 Restated Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on December 12, 1997 to announce the
signing of definitive agreements in connection with the formation of MAP.
Ashland has a 38% ownership interest, and Marathon has a 62% ownership
interest, in the company.
A report on Form 8-K was filed on January 16, 1998 to announce the
January 1 completion of a transaction forming MAP.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Ashland Inc.
----------------------------------
(Registrant)
Date /s/ Kenneth L. Aulen
------------------- -----------------------------------
Kenneth L. Aulen
Administrative Vice President and
Controller
(Chief Accounting Officer)
Date /s/ Thomas L. Feazell
-------------------- ----------------------------------
Thomas L. Feazell
Senior Vice President, General Counsel
and Secretary
19