==============================================================================
==============================================================================
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, 1998
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P. O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (606) 815-3333
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
At January 31, 1999, there were 74,364,034 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.
==============================================================================
PART I - FINANCIAL INFORMATION
------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
-------------------------
(In millions except per share data) 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues $ 1,646 $ 1,598
Equity income (loss) (40) 49
Other income 27 27
----------- -----------
1,633 1,674
COSTS AND EXPENSES
Cost of sales and operating expenses 1,299 1,308
Selling, general and administrative expenses 267 211
Depreciation, depletion and amortization 51 41
----------- -----------
1,617 1,560
----------- -----------
OPERATING INCOME 16 114
Interest expense (net of interest income) (33) (27)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (17) 87
Income taxes 6 (35)
----------- -----------
NET INCOME (LOSS) $ (11) $ 52
=========== ===========
EARNINGS (LOSS) PER SHARE - Note A
Basic $ (.14) $ .69
=========== ===========
Diluted $ (.14) $ .68
=========== ===========
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
- -----------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
December 31 September 30 December 31
(In millions) 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 91 $ 34 $ 48
Accounts receivable 1,109 1,129 996
Allowance for doubtful accounts (21) (19) (19)
Inventories - Note A 471 440 449
Deferred income taxes 96 104 99
Other current assets 114 140 85
---------- ---------- -----------
1,860 1,828 1,658
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 1,958 2,102 1,943
Investment in Arch Coal 419 422 413
Cost in excess of net assets of companies acquired 212 207 121
Other noncurrent assets 338 362 374
---------- ---------- -----------
2,927 3,093 2,851
PROPERTY, PLANT AND EQUIPMENT
Cost 2,472 2,413 2,159
Accumulated depreciation, depletion and amortization (1,289) (1,252) (1,160)
---------- ---------- -----------
1,183 1,161 999
---------- ---------- -----------
$ 5,970 $ 6,082 $ 5,508
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Debt due within one year $ 224 $ 125 $ 177
Trade and other payables 1,051 1,199 971
Income taxes 36 37 58
---------- ---------- -----------
1,311 1,361 1,206
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,511 1,507 1,345
Employee benefit obligations 458 458 394
Reserves of captive insurance companies 175 165 174
Other long-term liabilities and deferred credits 452 454 333
Commitments and contingencies - Note D
---------- ---------- -----------
2,596 2,584 2,246
COMMON STOCKHOLDERS' EQUITY 2,063 2,137 2,056
---------- ---------- -----------
$ 5,970 $ 6,082 $ 5,508
========== ========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
---------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------------------
Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings income Total
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 1, 1997 $ 75 $ 605 $ 1,379 $ (35) $ 2,024
Total comprehensive income (1) 52 (4) 48
Common stock cash dividends (21) (21)
Issued common stock under
Stock incentive plans 4 4
Acquisitions of other companies 1 1 2
Other changes (1) (1)
--------- --------- ---------- ------------ --------
BALANCE AT DECEMBER 31, 1997 $ 75 $ 609 $ 1,411 $ (39) $ 2,056
========= ========= ========== ============ ========
BALANCE AT OCTOBER 1, 1998 $ 76 $ 602 $ 1,501 $ (42) $ 2,137
Total comprehensive income (loss) (1) (11) (1) (12)
Common stock cash dividends (20) (20)
Issued common stock under
Stock incentive plans 5 5
Acquisitions of other companies 7 7
Repurchase of common stock (1) (53) (54)
--------- --------- ---------- ------------ --------
BALANCE AT DECEMBER 31, 1998 $ 75 $ 561 $ 1,470 $ (43) $ 2,063
========= ========= ========== ============ ========
----------------------------------------------------------------------------------------------------------------------------------
(1) Reconciliations of net income (loss) to total comprehensive income (loss) follow.
Three months ended
December 31
--------------------------
(In millions) 1998 1997
----------------------------------------------------------------------------------------------------
Net income (loss) $ (11) $ 52
Unrealized translation adjustments 1 (4)
Unrealized gains (losses) on securities (1) 2
Related tax benefit (expense) - (1)
Losses (gains) on securities included in net income (2) (2)
Related tax expense (benefit) 1 1
----------- ----------
Total comprehensive income (loss) $ (12) $ 48
=========== ==========
----------------------------------------------------------------------------------------------------
At December 31, 1998, accumulated other comprehensive income was a loss of $43 million comprised
of net unrealized translation losses of $27 million, a minimum pension liability of $18 million
and unrealized gains on securities of $2 million.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
- ---------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
--------------------------------
(In millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM CONTINUING OPERATIONS
Net income (loss) $ (11) $ 52
Expense (income) not affecting cash
Depreciation, depletion and amortization 51 41
Deferred income taxes (13) 10
Equity income from affiliates 40 (49)
Distributions from equity affiliates 106 64
Other items - (6)
Change in operating assets and liabilities (1) (100) (153)
----------- -----------
73 (41)
CASH FLOWS FROM FINANCING
Proceeds from issuance of capital stock 3 2
Repayment of long-term debt (21) (13)
Repurchase of capital stock (54) -
Increase in short-term debt 109 126
Dividends paid (20) (21)
----------- -----------
17 94
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (48) (52)
Purchase of leased assets associated with the formation of MAP - (228)
Purchase of operations - net of cash acquired (2) (8) (22)
Investment purchases (3) (42) (103)
Investment sales and maturities (3) 64 199
Other - net 1 29
----------- -----------
(33) (177)
----------- -----------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS 57 (124)
Cash used by discontinued operations - (78)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 57 (202)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 34 250
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 91 $ 48
=========== ===========
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Excludes changes resulting from operations acquired or sold.
(2) Amounts exclude acquisitions through the issuance of common stock, which amounted to $7 million in both 1998 and 1997.
(3) Represents primarily investment transactions of captive insurance companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
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, 1998. Results of operations for
the three months ended December 31, 1998, are not necessarily
indicative of results to be expected for the year ending September
30, 1999.
INVENTORIES
--------------------------------------------------------------------------------------------------------------------
December 31 September 30 December 31
(In millions) 1998 1998 1997
--------------------------------------------------------------------------------------------------------------------
Chemicals $ 376 $ 352 $ 381
Petroleum products 53 48 51
Construction materials 41 39 27
Other products 48 49 44
Supplies 9 9 10
Excess of replacement costs over LIFO carrying values (56) (57) (64)
-------- ------- -------
$ 471 $ 440 $ 449
======== ======= =======
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS).
-------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
-----------------------
(In millions except per share data) 1998 1997
--------------------------------------------------------------------------------------------------------------------
NUMERATOR
Numerator for basic and diluted EPS - Net income (loss) $ (11) $ 52
========= =========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 75 75
Common shares issuable upon exercise of stock options - 1
--------- ---------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 75 76
========= =========
BASIC EARNINGS (LOSS) PER SHARE $ (.14) $ .69
========= =========
DILUTED EARNINGS (LOSS) PER SHARE $ (.14) $ .68
========= =========
6
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE B - UNUSUAL ITEMS
During the quarter ended December 31, 1998, MAP recorded a pretax
charge of $244 million (Ashland's share amounted to $93 million,
or $57 million after tax) to adjust its inventory market valuation
reserve. The reserve reflects the excess of the LIFO cost of MAP's
crude oil and refined product inventories over their net
realizable values. During the quarter ended December 31, 1997,
Ashland recorded a pretax gain of $14 million ($6 million after
tax) on the sale of its 23% interest in Melamine Chemicals, Inc.
The following table shows the effects of unusual items on
Ashland's operating income, net income (loss) and diluted earnings
(loss) per share for the three months ended December 31, 1998, and
1997.
---------------------------------------------------------------------------------------------------------------------
Operating income Net income (loss)
-------------------------- -------------------------
1998 1997 1998 1997
(In millions excepet per share data)
---------------------------------------------------------------------------------------------------------------------
Income before unusual items $ 109 $ 100 $ 46 $ 46
MAP inventory valuation adjustments (93) - (57) -
Ashland Chemical gain on sale of Melamine Chemicals - 14 - 6
----------- ----------- ----------- -----------
Income as reported $ 16 $ 114 $ (11) $ 52
=========== =========== =========== ===========
Diluted earnings per share before unusual items $ .62 $ .60
Impact of unusual items (.76) .08
----------- -----------
Diluted earnings (loss) per share as reported $ (.14) $ .68
=========== ===========
NOTE C - UNCONSOLIDATED AFFILIATES
Ashland is required by Rule 3-09 of Regulation S-X to file
separate financial statements for its two significant
unconsolidated affiliates, Marathon Ashland Petroleum LLC (MAP)
and Arch Coal, Inc. Such financial statements for the year ended
December 31, 1998, will be filed by means of a Form 10-K/A on or
before March 31, 1999. Unaudited income statement information for
these companies is shown below.
Since MAP commenced operations on January 1, 1998, comparative
information for the quarter ended December 31, 1997, is not
presented. MAP's results for the quarter ended December 31, 1998,
included adjustments to MAP's inventory market valuation reserve.
See Note B for the impact of these adjustments on MAP's and
Ashland's results. MAP is organized as a limited liability company
(LLC) that has elected to be taxed as a partnership. Therefore,
the parents are responsible for income taxes applicable to their
share of MAP's taxable income. The net income reflected below for
MAP does not include any provision for income taxes which will be
incurred by MAP's parents.
-------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
------------------------------
(In millions) 1998 1997
-------------------------------------------------------------------------------------------------------------------
MAP
Sales and operating revenues $ 4,712
Loss from operations (91)
Net loss (88)
Ashland's equity loss (40)
ARCH COAL
Sales and operating revenues $ 394 $ 329
Income from operations 14 30
Net income - 21
Ashland's equity income (loss) (1) 11
7
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE D - LITIGATION, CLAIMS AND CONTINGENCIES
Ashland is subject to various federal, state and local
environmental laws and regulations that require remediation
efforts at multiple locations, including current operating
facilities, operating facilities conveyed to MAP, previously owned
or operated facilities, and Superfund or other waste sites. For
information regarding environmental capital expenditures and
reserves, see the "Miscellaneous - Environmental Matters" 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.
Ashland is a defendant in a series of cases involving more than
600 former workers at the Lockheed aircraft manufacturing facility
in Burbank, California. The plaintiffs allege personal injury
resulting from exposure to chemicals sold to Lockheed by Ashland,
and inadequate labeling of such chemicals. The cases are being
tried in the Superior Court of the State of California for the
County of Los Angeles. To date, five trials involving
approximately 130 plaintiffs have resulted in total verdicts
adverse to Ashland, after taking into consideration a reduction of
the punitive damages award in the fifth trial ordered by the trial
judge, of approximately $80 million (approximately $75 million of
which is punitive damages). The damage awards have been appealed.
Ashland continues to believe, upon advice of counsel, that there
is a substantial probability that the punitive damage awards will
be reversed or reduced substantially.
In addition to these matters, Ashland and its subsidiaries are
parties to numerous other claims and lawsuits, some of which are
also for substantial amounts. While these actions are being
contested, the outcome of individual matters is not predictable
with assurance.
Ashland does not believe that any liability resulting from any of
the above matters, after taking into consideration its insurance
coverage and amounts already provided for, will have a material
adverse effect on its consolidated financial position, cash flows
or liquidity. However, such matters could have a material effect
on results of operations in a particular quarter or fiscal year as
they develop or as new issues are identified.
NOTE E - ACQUISITIONS
During the three months ended December 31, 1998, APAC acquired two
relatively small construction businesses, one of which included
the issuance of $7 million in Ashland common stock. These
acquisitions were accounted for as purchases and did not have a
significant effect on Ashland's consolidated financial statements.
8
- -----------------------------------------------------------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
-------------------------------
(In millions except as noted) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues
Ashland Chemical $ 990 $ 1,014
APAC 428 337
Valvoline 234 254
Intersegment sales
Ashland Chemical (5) (4)
Valvoline (1) (3)
------------- -----------
1,646 1,598
Equity income (loss)
Ashland Chemical 1 2
Refining and Marketing (40) 36
Arch Coal (1) 11
------------- -----------
(40) 49
Other income
Ashland Chemical 7 21
APAC 2 1
Valvoline 2 3
Refining and Marketing 9 -
Corporate 7 2
------------- -----------
27 27
------------- -----------
$ 1,633 $ 1,674
============= ===========
OPERATING INCOME
Ashland Chemical $ 41 $ 53
APAC 26 19
Valvoline 11 11
Refining and Marketing (1) 52 36
Inventory valuation adjustments (2) (93) -
Arch Coal (1) 11
Corporate (20) (16)
------------- -----------
$ 16 $ 114
============= ===========
OPERATING INFORMATION
APAC
Construction backlog at December 31 (millions) $ 770 $ 651
Hot mix asphalt production (million tons) 6.8 5.3
Aggregate production (million tons) 5.2 4.6
Valvoline lubricant sales (thousand barrels per day) 15.8 15.5
Refining and Marketing (3)
Refined products sold (thousand barrels per day) 1,238.8
Crude oil refined (thousand barrels per day) 862.1
Arch Coal (3)
Tons sold (millions) 26.5 12.8
Tons produced (millions) 24.8 10.8
----------------------------------------------------------------------------------------------------------------------------------
(1) Effective January 1, 1998, includes Ashland's equity income from MAP, amortization of Ashland's excess investment in MAP, and
certain retained refining and marketing activities.
(2) Represents Ashland's share of changes in MAP's inventory market valuation reserve. The reserve reflects the excess of the
LIFO cost of MAP's crude oil and refined product inventories over their net realizable values.
(3) Amounts represent 100% of the volumes of MAP, or Arch Coal. MAP commenced operations January 1, 1998.
9
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Ashland recorded a net loss of $11 million for the quarter ended
December 31, 1998, compared to net income of $52 million for the
quarter ended December 31, 1997. Excluding unusual items described
in Note B to the Condensed Consolidated Financial Statements, net
income amounted to $46 million for both periods. Improvements in
operating income for Refining and Marketing, APAC and Ashland
Chemical were offset by a decline in operating results for Arch
Coal, increased corporate expenses and higher interest expense.
ASHLAND CHEMICAL
Ashland Chemical reported operating income of $41 million for the
quarter ended December 31, 1998. Results for last year's quarter
amounted to $39 million, excluding a $14 million pretax gain on
the sale of Ashland's 23% interest in Melamine Chemicals. The
improvement reflected record results from the Specialty Chemicals
Group, with record quarters for both the Composite Polymers and
Specialty Polymers & Adhesives divisions. The increase was
partially offset by a decline in Electronic Chemicals, reflecting
the lingering effects of the Asian crisis on the microelectronics
industry. However, Electronic Chemicals rebounded nicely from the
September 1998 quarter, reflecting the emerging recovery in that
industry. The Petrochemicals Group also showed improvement
compared to the December 1997 quarter, as the effects of a strong
maleic anhydride market more than offset the effects of a weak
methanol market.
APAC
For the first quarter of fiscal 1999, APAC's construction
operations reported record December quarter operating income of
$26 million, a 35% improvement over the $19 million reported for
the December quarter last year. Operating income increased from
all geographic regions as asphalt production reached record first
quarter levels. Net revenue (total revenue less subcontract work)
increased 27%, while production of hot mix asphalt was up 27% and
crushed aggregate was up 12% from the December 1997 quarter. In
addition, asphalt plant profits benefited from a 12% decrease in
liquid asphalt costs. The construction backlog at December 31,
1998, amounted to $770 million, the best December level in APAC
history, and represented an 18% improvement over the level of
December 1997. In keeping with Ashland's strategy to grow higher
return businesses, APAC completed two acquisitions in the December
1998 quarter and has since closed another. These acquisitions
strengthen APAC's market-leading position within its core
operating area in the southeastern and midwestern United States.
VALVOLINE
Valvoline reported operating income of $11 million for the quarter
ended December 31, 1998, essentially even with the December 1997
quarter. Results from the core lubricants business remained strong
and Valvoline Instant Oil Change had a record December quarter,
achieving higher daily car counts and lower operating expenses.
Valvoline International declined primarily due to lower results
from its European and Latin American operations. Looking forward,
Eagle One, the automotive appearance-product marketer Valvoline
acquired last February, succeeded in placing its products with all
of Valvoline's major retail accounts and is now well-positioned
for growth in the coming spring and summer selling season.
Additionally, Valvoline's new premium Synpower automotive
chemicals continue to gain momentum in the marketplace.
10
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
REFINING AND MARKETING
Operating income from Refining and Marketing (excluding $93
million in unfavorable inventory market valuation adjustments)
amounted to $52 million for the quarter ended December 31, 1998,
compared to $36 million for the quarter ended December 31, 1997.
Results for the current year include Ashland's 38% share of MAP's
earnings, amortization of Ashland's excess investment in MAP, and
results of certain retained refining and marketing activities.
Results for the prior year's quarter represent the operating
income of the former Ashland Petroleum and SuperAmerica divisions.
MAP was formed January 1, 1998, when Ashland combined its refining
and marketing operations with those of the USX-Marathon Group. The
increase in operating income includes substantial efficiency
improvements resulting from the combined operations of MAP. In the
year since it was formed, MAP has captured approximately $150
million in annual, repeatable, pretax savings and established
itself as an industry leader in earnings per barrel of crude oil
throughput. An additional $100 million in efficiencies are
targeted for calendar 1999. During 1998, MAP was able to overcome
significant decreases in refining crack spreads through the
realization of operating efficiencies, a strong performance by its
asphalt and retail operations, and lower energy costs.
ARCH COAL
Ashland recorded an operating loss of $1 million from its
investment in Arch Coal for the quarter ended December 31, 1998,
compared to operating income of $11 million for the quarter ended
December 31, 1997. The decline was due to delays in obtaining a
new surface-mining permit at West Virginia's Dal-Tex mine,
inadequate rail service and higher-than-expected operating costs
at Colorado's West Elk mine, and bitterly cold weather that
hindered both equipment and rail performance of Western
operations. During the quarter, Arch continued its program of
divesting non-strategic assets and recorded an after-tax gain of
$4.6 million from the sale of an idle coal dock in West Virginia.
That gain was partially offset by an after-tax charge of $2.4
million associated with Arch's routine, periodic review of
reclamation accruals.
As it previously announced, Arch expects continued earnings
weakness during calendar 1999. The delayed start of development
work on the new permit area at Dal-Tex will lead to a tough 1999
even if there is a favorable outcome on the pending injunction
hearing relating to the issued permits. Rail service at West Elk
may limit coal shipments again in 1999. Two small operations - the
Conant Mine in southern Illinois and Arch of Wyoming in the Hanna
Basin - face deteriorating markets for their products. Finally,
lower-than-expected price escalations in sales contracts and the
re-opening and renegotiation of several large contracts with a
large customer will hurt profitability.
CORPORATE
Corporate expenses amounted to $20 million in the quarter ended
December 31, 1998, compared to $16 million for the quarter ended
December 31, 1997. The increase reflects transition costs
associated with the restructuring of corporate general and
administrative functions and the relocation of corporate
headquarters to Covington, Ky., in the Cincinnati metropolitan
area.
INTEREST EXPENSE (NET OF INTEREST INCOME)
For the three months ended December 31, 1998, interest expense
(net of interest income) totaled $33 million, compared to $27
million for the December 1997 quarter. The increase reflects
increased debt levels resulting primarily from $254 million in
purchases of leased assets in December 1997 and January 1998
associated with the formation of MAP and from acquisitions during
1998.
11
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to obtain capital for
its financing needs and to maintain investment grade ratings on
its senior debt of Baa2 from Moody's and BBB from Standard &
Poor's. Ashland has a revolving credit agreement which expires on
February 9, 2000, providing for up to $320 million in borrowings,
none of which was in use at December 31, 1998. Under a shelf
registration, Ashland can also issue an additional $220 million in
medium-term notes should future opportunities or needs arise.
Furthermore, Ashland has access to various uncommitted lines of
credit and commercial paper markets, under which $193 million of
short-term borrowings were outstanding at December 31, 1998.
Cash flows from continuing operations, a major source of Ashland's
liquidity, amounted to $73 million for the quarter ended December
31, 1998, compared to a deficit of $41 million for the quarter
ended December 31, 1997. The increase reflects a higher level of
cash distributions from MAP, compared to cash generated from
Ashland's former Refining and Marketing operations in the prior
year's quarter, and less of an increase in working capital
requirements. Cash flows from continuing operations exceeded
Ashland's capital requirements for net property additions and
dividends by $6 million for the December 1998 quarter.
Operating working capital (accounts receivable and inventories,
less trade and other payables) at December 31, 1998, was $508
million, compared to $351 million at September 30, 1998, and $455
million at December 31, 1997. Liquid assets (cash, cash
equivalents and accounts receivable) amounted to 90% of current
liabilities at December 31, 1998, compared to 84% at September 30,
1998, and 85% at December 31, 1997. Ashland's working capital is
affected by its use of the LIFO method of inventory valuation,
which valued inventories $56 million below their replacement costs
at December 31, 1998.
CAPITAL RESOURCES
For the three months ended December 31, 1998, property additions
amounted to $48 million, compared to $52 million for the same
period last year. Property additions and cash dividends for the
remainder of fiscal 1999 are estimated at $150 million and $60
million. On August 7, 1998, Ashland's Board of Directors
authorized the company to repurchase up to 4 million shares of its
common stock in the open market. Through December 31, 1998, 2
million shares had been repurchased at a cost of $97 million. On
January 28, 1999, Ashland's Board increased the authorization,
from 1.6 million remaining shares under the previous
authorization, back up to 4 million additional shares. The timing
and exact number of shares to be repurchased will be dependent on
market conditions. Ashland anticipates meeting its remaining 1999
capital requirements for property additions, debt repayments and
dividends primarily from internally generated funds. However,
external financing may be necessary to fund the remainder of these
requirements, as well as common stock repurchases and
acquisitions.
At December 31, 1998, Ashland's debt level amounted to $1.7
billion, compared to $1.6 billion at September 30, 1998. Debt as a
percent of capital employed amounted to 46% at December 31, 1998,
compared to 43% at September 30, 1998. During the quarter ended
December 31, 1998, Ashland liquidated $200 million of its interest
rate swap agreements, which had converted fixed-rate debt to
floating rates at September 30, 1998. As a result, Ashland's
exposure to short-term interest rate fluctuations for the
remainder of 1999 will be limited to $39 million in floating-rate
debt outstanding at December 31, 1998, the remaining $25 million
floating-rate swap agreement, and any short-term notes and
commercial paper outstanding.
12
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED 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 its businesses. Although
it cannot accurately predict how such trends will affect future
operations and earnings, Ashland believes the nature and
significance of its ongoing compliance costs will be comparable to
those of its competitors. For information on certain specific
environmental proceedings and investigations, see the "Legal
Proceedings" section of this Form 10-Q. For information regarding
environmental capital expenditures and reserves, see the
"Miscellaneous - Environmental Matters" 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.
Ashland does not believe that any liability resulting from
environmental matters, after taking into consideration its
insurance coverage and amounts already provided for, will have a
material adverse effect on its consolidated financial position,
cash flows or liquidity. However, such matters could have a
material effect on results of operations in a particular quarter
or fiscal year as they develop or as new issues are identified.
YEAR 2000 READINESS
Ashland, like most other companies, is faced with the Year 2000
issue and began developing plans in 1994 to address the possible
exposures. Project teams are responsible for coordinating the
assessment, remediation and testing of the necessary modifications
to Ashland's computer applications, including both internal
information systems and embedded systems, as well as assessing the
Year 2000 readiness of its major vendors and developing
contingency plans. The team's progress is regularly monitored by
Ashland's senior management and periodically reported to the Audit
Committee of Ashland's Board of Directors.
Ashland has completed the assessment phase related to its internal
information systems, and is resolving identified issues through
system modifications or replacement. Although testing will
continue, Ashland believes that about 90% of its significant
systems are currently Year 2000 compliant, and that the remainder
will be compliant by April 1999.
Ashland is also assessing the embedded systems that operate such
items as its manufacturing systems, laboratory processes and
security systems. Ashland expects to complete this assessment by
April 1999, and remediate or replace non-compliant embedded
systems as necessary by June 1999. The quality of the responses
received from the manufacturers of such equipment, the estimated
effect of the individual system on Ashland, and the ability of
Ashland to perform meaningful tests will determine whether
independent testing of embedded systems will be conducted.
13
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
YEAR 2000 READINESS (continued)
Formal communications have been initiated with major vendors to
assess the potential exposure to Ashland from their failure to
remediate their own Year 2000 issues. A failure by any of these
vendors could become a significant challenge to Ashland's ability
to operate its facilities at affected locations. Vendors contacted
include Ashland's suppliers, financial institutions and companies
providing utilities (electric, telephone and water). Alternate
providers of products and services will be established, if deemed
necessary. Although Ashland has no means of ensuring the Year 2000
readiness of such vendors, it will continue to gather information
and monitor their compliance. Based on the representations
provided by these vendors to date, Ashland has no reason to
believe that these vendors are not addressing their Year 2000
issues adequately.
Ashland is also developing contingency plans related to the Year
2000 issue, addressing various scenarios and alternatives. Among
other things, such plans will likely include replacing electronic
applications with manual processes, identifying alternate vendors,
adjusting staffing requirements, and increasing raw material
inventory levels, as deemed necessary. Pilot programs have been
established within Ashland. Contingency plans are expected to be
completed by June 1999, and will be regularly updated as current
issues develop or new issues are identified.
Although a full assessment has not yet been completed, Ashland
estimates that its fiscal 1999 costs related to Year 2000 issues
will not exceed $15 million, and will be minimal thereafter. Such
amount is based on various assumptions, including the expected
availability and costs of internal and external resources and the
complexity of the necessary changes. Such estimate does not
include any costs of new systems for which the principal
justification is improved business functionality, rather than Year
2000 compliance. Since Ashland's Year 2000 compliance program was
initiated several years ago and has been integrated with other
system enhancements, Ashland's total costs of remediating Year
2000 issues are not readily discernible.
Ashland believes it has an effective program to resolve
significant Year 2000 issues in a timely manner. However, certain
phases of that program have not yet been completed and some
exposures are outside Ashland's direct control. If Ashland is
unsuccessful in identifying or remediating Year 2000 issues in its
significant systems, is affected by major vendors or customers not
being Year 2000 compliant, or is affected by general economic
disruptions resulting from Year 2000 issues, its consolidated
financial position or results of operations could be materially
adversely affected.
MAP and Arch Coal also have prepared their own programs to deal
with Year 2000 issues. Arch Coal's program is outlined in the
Management's Discussion and Analysis section of its Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
MAP's program is covered in the Management's Discussion and
Analysis section for the Marathon Group in USX Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998. Both of these documents are on file with the Securities and
Exchange Commission.
14
- -----------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, with respect to
Ashland's operating performance. Estimates as to operating
performance are based upon a number of assumptions, including
(among others) prices, supply and demand, market conditions and
operating efficiences. Although Ashland believes that its
expectations are based on reasonable assumptions, it cannot assure
that the expectations reflected herein will be achieved. This
forward-looking information may prove to be inaccurate, and actual
results may differ significantly from those anticipated. Other
factors and risks affecting Ashland are contained in Ashland's
Form 10-K for the fiscal year ended September 30, 1998.
15
PART II - OTHER INFORMATION
- ------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - As of December 31, 1998, Ashland had
been identified as a "potentially responsible party" ("PRP") under
Superfund or similar state laws for potential joint and several
liability for clean-up costs in connection with alleged releases
of hazardous substances in connection with 90 waste treatment or
disposal sites. These sites are currently subject to ongoing
investigation and remedial activities, overseen by the United
States Environmental Protection Agency ("EPA") or a state agency,
in which Ashland is typically participating as a member of a PRP
group. Generally, the type of relief sought includes remediation
of contaminated soil and/or groundwater, reimbursement for past
costs of site clean-up and administrative oversight, and/or
long-term monitoring of environmental conditions at the sites.
Ashland carefully monitors the investigatory and remedial activity
at many of these sites. Based on its experience with site
remediation, its familiarity with current environmental laws and
regulations, its analysis of the specific hazardous substances at
issue, the existence of other financially viable PRPs and its
current estimates of investigatory, clean-up and monitoring costs
at each site, Ashland believes that its liability at these sites,
either individually or in the aggregate, after taking into account
its insurance coverage and established reserves, will not have a
material adverse effect on Ashland's consolidated financial
position, cash flow or liquidity. However, such matters could have
a material effect on results of operations in a particular quarter
or fiscal year as they develop or as new issues are identified.
Estimated costs for these matters are recognized in accordance
with generally accepted accounting principles governing the
likelihood that costs will be incurred and Ashland's ability to
reasonably estimate future costs.
LOCKHEED LITIGATION - Ashland is a defendant in a series of cases
involving more than 600 former workers at the Lockheed aircraft
manufacturing facility in Burbank, California. The plaintiffs
allege personal injuries resulting from exposure to chemicals sold
to Lockheed by Ashland, and inadequate labeling of such chemicals.
The cases are being tried in the Superior Court of the State of
California for the County of Los Angeles. To date, five trials
involving approximately 130 plaintiffs have resulted in total
verdicts adverse to Ashland, after taking into consideration a
reduction of the punitive damages award in the fifth trial ordered
by the trial judge, of approximately $80 million (approximately
$75 million of which is punitive damages). The damage awards have
been appealed. Ashland continues to believe, upon advice of
counsel, that there is a substantial probability that the punitive
damage awards will be reversed or substantially further reduced,
and that, after taking into account probable recoveries under
insurance policies, these cases will not have a material adverse
effect on Ashland's consolidated financial position, cash flow or
liquidity.
In addition, Ashland filed an action in Kentucky against
approximately 44 insurance carriers to confirm coverage for
liabilities under the Lockheed cases. One of the insurance
carriers in turn filed an action in California seeking to deny
insurance coverage for liabilities in these cases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Ashland's Annual Meeting of Shareholders was held on January
28, 1999, at the Metropolitan Club, 50 E. RiverCenter
Boulevard, Covington, Kentucky at 10:30 a.m.
(b) At its Annual Meeting, Ashland's shareholders elected four
directors (Frank C. Carlucci, James B. Farley, Dr. Bernadine
P. Healy and W. L. Rouse, Jr.) to serve a three-year term and
one director (Dr. Ernest H. Drew) to serve a two-year term.
16
Votes
-----
Affirmative Withheld
----------- ---------
- - Frank C. Carlucci 65,050,666 1,041,083
- - Dr. Ernest H. Drew 65,158,866 932,883
- - James B. Farley 65,158,552 933,197
- - Dr. Bernadine P. Healy 65,119,591 972,158
- - W. L. Rouse, Jr. 65,146,413 945,336
Directors who continued in office: Samuel C. Butler, Paul W.
Chellgren, Ralph E. Gomory, Mannie L. Jackson, Patrick F.
Noonan, Jane C. Pfeiffer and Michael D. Rose.
(c) At its Annual Meeting, Ashland's shareholders ratified the
appointment of Ernst & Young LLP as independent auditors for
fiscal year 1999 by a vote of 65,141,972 affirmative, to
636,796 negative and 312,981 abstention votes.
(d) The results of voting on a shareholder proposal to spin-off
Ashland Chemical, APAC and Valvoline as three separate
companies were 55,896,017 negative, to 5,510,041 affirmative,
751,875 abstention votes and 3,933,816 broker non-votes.
(e) The results of voting on a shareholder proposal to distribute
Arch Coal, Inc. stock to Ashland shareholders were 55,813,273
negative, to 5,469,551 affirmative, 875,109 abstention votes
and 3,933,816 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.2 Bylaws of Ashland, as amended to January 28, 1999
10.1 Form of Ashland Inc. Executive Employment Agreement between
Ashland and certain executives of Ashland
10.2 Ashland Inc. 1995 Performance Unit Plan, as amended to
January 27, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
None
17
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 11, 1999 /s/ Kenneth L. Aulen
------------------ -----------------------------------
Kenneth L. Aulen
Administrative Vice President and
Controller
(Chief Accounting Officer)
Date February 11, 1999 /s/ David L. Hausrath
------------------- ------------------------------------
David L. Hausrath
Vice President and General Counsel
18