SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2918
ASHLAND INC.
(Formerly Ashland Oil, Inc.)
(Exact name of registrant as specified in its charter)
Kentucky 61-0122250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Ashland Drive, Russell, Kentucky 41169
(Address of principal executive offices) (Zip Code)
P.O. Box 391, Ashland, Kentucky 41114
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code (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 April 14, 1995, there were 62,197,209 shares of Registrant's Common Stock
outstanding. One-half of one Right to purchase one-tenth of a share of
Cumulative Preferred Stock, Series of 1987 accompanies each outstanding share
of Registrant's Common Stock.
PART I - FINANCIAL INFORMATION
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Six months ended
March 31 March 31
------------------ ------------------
(In millions except per share data) 1995 1994 1995 1994
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REVENUES
Sales and operating revenues (including excise taxes) $ 2,735 $ 2,207 $ 5,659 $ 4,778
Other 22 16 37 23
---------- ---------- ---------- ----------
2,757 2,223 5,696 4,801
COSTS AND EXPENSES
Cost of sales and operating expenses 2,120 1,610 4,333 3,524
Excise taxes on products and merchandise 237 199 480 405
Selling, general and administrative expenses 280 252 552 498
Depreciation, depletion and amortization 96 71 191 144
General corporate expenses 20 23 45 42
---------- ---------- ---------- ----------
2,753 2,155 5,601 4,613
---------- ---------- ---------- ----------
OPERATING INCOME 4 68 95 188
OTHER INCOME (EXPENSE)
Interest expense (net of interest income) (41) (29) (78) (57)
Equity income (loss) 4 4 9 (3)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (33) 43 26 128
Income taxes 9 (10) (7) (37)
Minority interest in earnings of subsidiaries (5) - (13) -
---------- ---------- ---------- ----------
NET INCOME (LOSS) (29) 33 6 91
Dividends on convertible preferred stock (5) (5) (9) (9)
---------- ---------- ---------- ----------
INCOME (LOSS) AVAILABLE TO COMMON SHARES $ (34) $ 28 $ (3) $ 82
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE - Note E
Primary $ (.55) $ .47 $ (.05) $ 1.36
Assuming full dilution $ (.55) $ .46 $ (.05) $ 1.30
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .25 $ .55 $ .50
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31 September 30 March 31
(In millions) 1995 1994 1994
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 60 $ 40 $ 65
Accounts receivable 1,432 1,346 1,096
Allowance for doubtful accounts (23) (23) (21)
Construction completed and in progress 20 55 22
Inventories - Note B 812 601 594
Deferred income taxes 73 71 64
Other current assets 134 81 91
---------- --------- ----------
2,508 2,171 1,911
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates 154 291 269
Investments of captive insurance companies 188 181 190
Cost in excess of net assets of companies acquired 86 80 55
Prepaid coal royalties 65 - -
Coal supply agreements 50 - -
Other noncurrent assets 325 276 292
---------- --------- ----------
868 828 806
PROPERTY, PLANT AND EQUIPMENT
Cost 7,042 5,898 5,764
Accumulated depreciation, depletion and amortization (3,449) (3,082) (2,986)
---------- --------- ----------
3,593 2,816 2,778
---------- --------- ----------
$ 6,969 $ 5,815 $ 5,495
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt due within one year $ 333 $ 133 $ 71
Trade and other payables 1,656 1,520 1,368
Income taxes 39 35 23
---------- --------- ----------
2,028 1,688 1,462
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,809 1,391 1,377
Accrued pension and other postretirement benefits 581 515 508
Reserves of captive insurance companies 191 173 192
Deferred income taxes 113 30 34
Other long-term liabilities and deferred credits 452 423 394
Commitments and contingencies - Note C
---------- --------- ----------
3,146 2,532 2,505
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 173 - -
STOCKHOLDERS' EQUITY
Convertible preferred stock 293 293 293
Common stockholders' equity 1,329 1,302 1,235
---------- --------- ----------
1,622 1,595 1,528
---------- --------- ----------
$ 6,969 $ 5,815 $ 5,495
========== ========= ==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
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Loan to
leveraged
employee Prepaid
stock contri-
ownership bution
Common Paid-in Retained plan to
(In millions) stock capital earnings (LESOP) LESOP Other Total
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BALANCE AT OCTOBER 1, 1993 $ 60 $ 143 $ 1,008 $ (33) $ (6) $ (10) $ 1,162
Net income 91 91
Dividends
Preferred stock (9) (9)
Common stock (30) (30)
Issued common stock under stock
incentive plans 1 15 16
Allocation of LESOP shares to participants 6 6
Other changes (1) (1)
-------- -------- --------- ----------- -------- ------- ---------
BALANCE AT MARCH 31, 1994 $ 61 $ 158 $ 1,060 $ (33) $ - $ (11) $ 1,235
======== ======== ========= =========== ======== ======= =========
BALANCE AT OCTOBER 1, 1994 $ 61 $ 159 $ 1,126 $ (33) $ - $ (11) $ 1,302
Net income 6 6
Dividends
Preferred stock (9) (9)
Common stock (33) (33)
Issued 1,250,623 common shares in
the acquisition of certain assets
of Waco Oil and Gas Co. 1 39 40
Issued common stock under stock
incentive plans 4 4
LESOP loan repayments 11 11
Other changes 8 8
-------- -------- --------- ---------- -------- ------ ---------
BALANCE AT MARCH 31, 1995 $ 62 $ 202 $ 1,090 $ (22) $ - $ (3) $ 1,329
======== ======== ========= =========== ======== ======= =========
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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Six months ended
March 31
----------------------------
(In millions) 1995 1994
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CASH FLOWS FROM OPERATIONS
Net income $ 6 $ 91
Expense (income) not affecting cash
Depreciation, depletion and amortization (1) 197 150
Deferred income taxes 13 10
Prepaid coal royalties expensed 9 -
Minority interest in earnings of subsidiaries 13 -
Undistributed earnings of unconsolidated affiliates (3) 5
Other noncash items (15) 29
Change in operating assets and liabilities (2) (91) 14
--------- ---------
129 299
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 273 -
Proceeds from issuance of capital stock 1 16
Repayment of long-term debt (15) (35)
Increase (decrease) in short-term debt 92 (76)
Dividends paid (44) (39)
--------- ---------
307 (134)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (218) (153)
Purchase of operations - net of cash acquired (192) (43)
Proceeds from sale of operations 5 54
Disposals of property, plant and equipment 6 7
Advances on prepaid coal royalties (3) -
Investment purchases (3) (262) (136)
Investment sales and maturities (3) 248 130
--------- ---------
(416) (141)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 20 24
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 40 41
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 60 $ 65
========= =========
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(1) Includes amounts charged to general corporate expenses.
(2) Excludes changes resulting from operations acquired or sold.
(3) Represents primarily investment transactions of captive insurance companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - GENERAL
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and Securities
and Exchange Commission regulations, but are subject to any year-end
audit adjustments which may be necessary. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. These financial statements should be read in conjunction
with Ashland's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994. Results of operations for the periods ended
March 31, 1995, are not necessarily indicative of results to be
expected for the year ending September 30, 1995.
NOTE B - INVENTORIES
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March 31 September 30 March 31
(In millions) 1995 1994 1994
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Crude oil $ 308 $ 243 $ 244
Petroleum products 349 286 275
Chemicals and other products 492 421 349
Materials and supplies 68 46 43
Excess of replacement costs over LIFO carrying values (405) (395) (317)
-------- ------- -------
$ 812 $ 601 $ 594
======== ======= =======
NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES
Federal, state and local statutes and regulations relating to the
protection of the environment have a significant impact on the
conduct of Ashland's businesses. For information regarding
environmental expenditures and reserves, see the "Miscellaneous -
Governmental Regulation and Action - Environmental Protection"
section of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties
which affect Ashland's ability to estimate its share of the ultimate
costs of required remediation efforts. Such uncertainties involve
the nature and extent of contamination at each site, the extent of
required cleanup efforts under existing environmental regulations,
widely varying costs of alternate cleanup methods, changes in
environmental regulations, the potential effect of continuing
improvements in remediation technology, and the number and financial
strength of other potentially responsible parties at multiparty
sites. As a result, charges to income for environmental liabilities
could have a material effect on results of operations in a
particular quarter or fiscal year as assessments and remediation
efforts proceed or as new remediation sites are identified. However,
such charges are not expected to have a material adverse effect on
Ashland's consolidated financial position.
Ashland has numerous insurance policies that provide coverage at
various levels for environmental costs. Ashland is currently
involved in negotiations concerning the amount of insurance coverage
for environmental costs under some of these policies. In addition,
various costs of remediation efforts related to underground storage
tanks are eligible for reimbursement from state administered funds.
Probable recoveries related to certain costs incurred or expected to
be incurred in future years are included in other noncurrent assets.
6
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
In addition, Ashland and its subsidiaries are parties to numerous
claims and lawsuits (some of which are for substantial amounts) with
respect to product liability and commercial and other matters. While
these claims and actions are being contested, the outcome of
individual matters is not predictable with assurance. Although any
actual liability is not determinable as of March 31, 1995, Ashland
believes that any liability resulting from these matters involving
Ashland and its subsidiaries, after taking into consideration
Ashland's insurance coverages and amounts already provided for,
should not have a material adverse effect on Ashland's consolidated
financial position.
In a development affecting Ashland, Columbia Gas Transmission and
Columbia Gas Systems last week filed reorganization plans with the
U.S. Bankruptcy Court in Delaware. The plans included a settlement
agreement entered into by Ashland Exploration and the two Columbia
companies, resolving claims between the parties. Subject to approval
by the Bankruptcy Court and other approvals and contingencies, the
negotiated agreement would provide for a $78.5 million payment to
Ashland, of which 5 percent would be withheld to potentially satisfy
the claims of non-settling producers.
NOTE D - ACQUISITIONS
During the six months ended March 31, 1995, Ashland acquired the
Zerex(R) antifreeze product line, the northern West Virginia assets
of two natural gas companies, a marine chemical business, a
construction materials operation and a road paving company. These
acquisitions were generally accounted for as purchases and did not
have a significant effect on Ashland's consolidated financial
statements.
In February 1995, Ashland purchased from Saarbergwerke AG all of
Ashland Coal's Class B Preferred Stock for $110 million,
representing about 15 percent of Ashland Coal's voting stock. The
purchase increased Ashland's ownership of Ashland Coal from 39
percent to 54 percent. As a result of this transaction, Ashland Coal
has been consolidated into Ashland's financial statements
retroactive to October 1, 1994. Ashland's investment in Ashland Coal
previously had been accounted for on the equity method. The
restatement of Ashland's financial statements as of and for the
quarter ended December 31, 1994, had no effect on net income or
earnings per share, but did impact individual components of the
income statement and the balance sheet as summarized in the table
below.
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As Previously Effect of
(In millions) Reported Consolidation As Restated
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INCOME STATEMENT
Sales and operating revenues $ 2,768 $ 156 $ 2,924
Operating income 71 20 91
Income before income taxes 50 9 59
BALANCE SHEET
Current assets $ 2,259 $ 126 $ 2,385
Investments and other assets 850 (24) 826
Property, plant and equipment 2,842 593 3,435
-------- --------- --------
Total assets $ 5,951 $ 695 $ 6,646
======== ========= ========
Current liabilities $ 1,753 $ 138 $ 1,891
Noncurrent liabilities 2,579 331 2,910
Minority interest in consolidated subsidiaries - 226 226
Stockholders' equity 1,619 - 1,619
-------- --------- --------
Total liabilities and stockholders' equity $ 5,951 $ 695 $ 6,646
======== ========= ========
7
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE E - COMPUTATION OF EARNINGS (LOSS) PER SHARE
--------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
------------------------ -------------------------
(In millions except per share data) 1995 1994 1995 1994
--------------------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS (LOSS) PER SHARE
Income (loss) available to common shares
Net income (loss) $ (29) $ 33 $ 6 $ 91
Dividends on convertible preferred stock (5) (5) (9) (9)
--------- -------- --------- ---------
$ (34) $ 28 $ (3) $ 82
========= ======== ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 61 60 61 60
Common shares issuable upon exercise of stock options - 1 - 1
Share adjustment for LESOP - - - (1)
--------- -------- --------- ---------
61 61 61 60
========= ======== ========= =========
Earnings (loss) per share $ (.55) $ .47 $ (.05) $ 1.36
========= ======== ========= =========
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EARNINGS (LOSS) PER SHARE
ASSUMING FULL DILUTION
Income (loss) available to common shares
Net income (loss) $ (29) $ 33 $ 6 $ 91
Dividends on convertible preferred stock (5) (5) (9) -
Interest on convertible debentures (net of income taxes) - - - 3
--------- -------- --------- ---------
$ (34) $ 28 $ (3) $ 94
========= ======== ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 61 60 61 60
Common shares issuable upon
Exercise of stock options - 1 - 1
Conversion of debentures - - - 3
Conversion of preferred stock - - - 9
--------- -------- --------- ---------
61 61 61 73
========= ======== ========= =========
Earnings (loss) per share $ (.55) $ .46 $ (.05) $ 1.30
========= ======== ========= =========
8
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
------------------------- ------------------------------
(Dollars in millions except as noted) 1995 1994 1995 1994
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SALES AND OPERATING REVENUES
Petroleum $ 1,122 $ 971 $ 2,350 $ 2,136
SuperAmerica 404 381 846 805
Valvoline 238 213 506 485
Chemical 887 683 1,705 1,327
Construction 176 176 451 492
Coal 152 - 308 -
Exploration 45 48 93 99
Intersegment sales (289) (265) (600) (566)
---------- ---------- ---------- ----------
$ 2,735 $ 2,207 $ 5,659 $ 4,778
========== ========== ========== ==========
OPERATING INCOME
Petroleum $ (51) $ 30 $ (49) $ 75
SuperAmerica 6 10 23 31
Valvoline 2 12 11 26
---------- ---------- ---------- ----------
Total Refining and Marketing Group (43) 52 (15) 132
Chemical 53 26 100 54
Construction 1 3 21 23
Coal 14 - 34 -
Exploration (1) 10 - 21
General corporate expenses (20) (23) (45) (42)
---------- ---------- ---------- ----------
$ 4 $ 68 $ 95 $ 188
========== ========== ========== ==========
EQUITY INCOME (LOSS)
Arch Mineral Corporation $ - $ 4 $ 3 $ (4)
Ashland Coal, Inc. - (1) - (2)
Other 4 1 6 3
---------- ---------- ---------- ----------
$ 4 $ 4 $ 9 $ (3)
========== ========== ========== ==========
OPERATING INFORMATION
Petroleum
Product sales (thousand barrels per day) (1) 344.8 304.7 352.5 341.3
Refining inputs (thousand barrels per day) (2) 338.1 296.1 329.9 328.1
Value of products manufactured per barrel $ 20.98 $ 20.02 $ 21.19 $ 20.45
Input cost per barrel 18.72 14.44 18.23 15.19
---------- ---------- ---------- ----------
Refining margin per barrel $ 2.26 $ 5.58 $ 2.96 $ 5.26
SuperAmerica
Product sales (thousand barrels per day) 68.0 66.0 70.3 69.0
Merchandise sales $ 123 $ 117 $ 255 $ 241
Valvoline lubricant sales (thousand barrels per day) (1) 18.3 16.9 17.9 16.7
Construction backlog
At end of period $ 599 $ 508 $ 599 $ 508
Increase during period (3) $ 76 $ 61 $ 45 $ 13
Exploration
Net daily production
Natural gas (million cubic feet) (1) 102.4 96.5 95.6 98.4
Nigerian crude oil (thousand barrels) 16.4 19.2 17.9 19.3
Sales price
Natural gas (per thousand cubic feet) $ 1.93 $ 2.49 $ 1.90 $ 2.53
Nigerian crude oil (per barrel) $ 15.94 $ 13.55 $ 15.89 $ 14.36
Arch Mineral Corporation (4)
Tons sold (millions) 6.8 5.7 14.1 9.5
Sales price per ton $ 26.44 $ 27.31 $ 26.65 $ 26.01
Ashland Coal, Inc. (4)
Tons sold (millions) 5.5 4.5 10.9 7.9
Sales price per ton $ 27.81 $ 29.77 $ 28.14 $ 30.69
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(1) Includes intersegment sales.
(2) Includes crude oil and other purchased feedstocks.
(3) Amounts have been restated to exclude APAC's Arizona operations which
were sold in February 1994.
(4) Ashland's interest is 50% in Arch Mineral and 54% in Ashland Coal (39%
prior to February 1995).
9
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
Current Quarter - Ashland recorded a net loss of $29 million for the
three months ended March 31, 1995, compared to net income of $33
million for the same period last year. Operating income for the
current quarter totaled $4 million, compared to $68 million for last
year's March quarter. The decrease in earnings was due primarily to a
substantial decline in operating income from Petroleum, in addition
to lower profits from SuperAmerica, Valvoline and Exploration.
Partially offsetting these negative comparisons, Chemical reported
record quarterly income and earnings from Ashland Coal improved.
Construction also reported strong earnings from continuing
operations, as the unfavorable comparison resulted from a gain on the
sale of its Arizona operations in last year's quarter.
In February, Ashland completed the purchase of all of the Class B
Preferred Stock of Ashland Coal, Inc. from Saarbergwerke AG. Ashland
now owns approximately 54% of the voting stock of Ashland Coal, and
consequently, the results of Ashland Coal have been consolidated
retroactive to the beginning of this fiscal year. Since the prior
year was accounted for on the equity method, comparisons between
years are difficult.
Year-to-Date - Net income for the six months ended March 31, 1995,
amounted to $6 million, compared to $91 million for the six months
ended March 31, 1994. The decline in earnings primarily reflects the
same factors described in the quarterly comparison.
PETROLEUM
Current Quarter - Ashland Petroleum reported an operating loss of $51
million for the quarter ended March 31, 1995, compared to income of
$30 million for the same period last year. A decrease in the refining
margin (the difference between the value of products manufactured and
input cost) was the primary factor for the decline in earnings. The
refining margin was $2.26 per barrel for the current quarter,
compared to $5.58 per barrel in last year's March quarter. Such
margins reflected the second warmest winter on record and the market
confusion surrounding the introduction of reformulated gasoline
(RFG), which at times pushed industry refining margins below
variable-cost breakeven levels in the March quarter. Pittsburgh and
28 counties in Western Pennsylvania, which were counted on as a major
RFG market, opted out of the program at the last moment even though
this product was already in the distribution chain. This opt-out,
coupled with political resistance in Milwaukee and other RFG markets,
created great uncertainty in the marketplace. Throughput was
curtailed at times in reaction to the low margins; however, average
throughput volumes for the quarter were up due to the negative impact
of a major maintenance turnaround at the Catlettsburg, Kentucky
refinery last year. Also, results from Scurlock Permian improved,
reflecting lower operating costs due to the streamlining and
combination of operations, and an increase in margins, while Pipeline
profits were up due to tariff increases and higher volumes as a
result of the rise in refinery inputs.
Year-to-Date - For the six months ended March 31, 1995, Ashland
Petroleum recorded an operating loss of $49 million, compared to
operating income of $75 million for the same period last year. The
majority of the decline in earnings was attributed to a decrease in
the refining margin to $2.96 per barrel this year, compared to $5.26
per barrel last year. Partially offsetting the drop in the refining
margin, profits from Scurlock Permian increased, reflecting improved
margins and lower operating costs, while higher earnings from
Ashland's pipeline operations resulted from increased tariffs this
year and a loss on the sale of certain assets which was included in
last year's results. Looking ahead, refining margins have improved
considerably in recent weeks and U.S. gasoline demand so far this
year has been running approximately 3% above last year. Demand growth
is anticipated to remain strong through the summer driving season. In
addition, gasoline inventories currently are below last year's low
level and gasoline imports for the year are below 1994 levels as
well.
10
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
SUPERAMERICA
Current Quarter - Operating income for the second quarter of fiscal
1995 totaled $6 million, compared to $10 million for the second
quarter of fiscal 1994. The decline in earnings reflected lower
retail gasoline margins and higher operating costs, only partially
offset by increases in gasoline and merchandise sales volumes. An
increase in the average number of stores in operation this year
contributed to higher gasoline and merchandise volumes and the
increased costs.
Year-to-Date - For the six months ended March 31, 1995,
SuperAmerica's operating income of $23 million declined $8 million
from the same period last year. The decrease in earnings reflected
the same factors described in the quarterly comparison. At March 31,
1995, 598 stores were operating, compared to 594 stores at March 31,
1994.
VALVOLINE
Current Quarter - For the three months ended March 31, 1995,
operating income for Valvoline totaled $2 million, compared to $12
million for the same period last year. The decline in earnings
reflected lower margins on branded motor oil sales, due to higher raw
material costs. Valvoline raised motor oil prices in February, but it
had little effect on margins during the quarter as customers
increased their purchases in advance of such increase. In addition,
the mild winter weather adversely affected the sale of winter-related
products, while Pyroil's R-12 refrigerant sales and margins were
lower as a result of an oversupply of product in the marketplace.
Year-to-Date - For the six months ended March 31, 1995, Valvoline
reported operating income of $11 million, compared to $26 million for
the same period last year. In addition to a decline in margins,
branded motor oil results were negatively impacted by lower sales
volumes. Pyroil's profits were lower, primarily reflecting a decline
in refrigerant sales volumes. The newly acquired Zerex(R) antifreeze
product line contributed to earnings this fiscal year, but sales were
sluggish due to the mild winter weather.
CHEMICAL
Current Quarter - For the second quarter of fiscal 1995, Ashland
Chemical reported a record quarterly operating income of $53 million,
more than double the same quarter a year ago. Ashland Chemical has
reported record operating income in four consecutive quarters. Strong
prices for petrochemicals, including methanol, were a major
contributor to higher operating income for the quarter, although
methanol prices have since returned to more normal levels. Results
from the distribution businesses improved significantly also, while
operating income from specialty chemical operations remained strong.
Year-to-Date - For the six months ended March 31, 1995, operating
income totaled $100 million, compared to $54 million for the same
period last year. Earnings increased 84%, reflecting improvements in
each of its three business segments. Sales are 29% ahead of last year
on slightly higher volumes and price increases for several major
products. Ashland Chemical completed the acquisition of Aristech
Chemical Corporation's unsaturated polyester resins, polyester
distribution and maleic anhydride businesses on April 28, 1995.
11
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
CONSTRUCTION
Current Quarter - For the second quarter of fiscal 1995, Construction
operations reported operating income of $1 million, compared to $3
million for the same period last year. A gain from the sale of the
Arizona operations in last year's second quarter accounted for the
unfavorable comparison between the two quarters. Earnings for this
year's March quarter, which included a gain on the sale of an
aggregate property, exceeded the winter costs which are normally
deferred and amortized over the last half of the fiscal year.
Year-to-Date - For the six months ended March 31, operating income
totaled $21 million this year, compared to $23 million last year.
Earnings declined reflecting the sale of the Arizona operations last
year. However, operating income from continuing operations improved
34% this year, reflecting favorable operating conditions and better
margins. Backlog at March 31, 1995 of $599 million was up 18% from
the $508 million at March 31, 1994. As a result, Construction is
entering the summer season with a large backlog and no deferred
winter costs.
COAL
Current Quarter - As a result of Ashland's acquisition of an
additional 15% interest, Ashland Coal has been consolidated
retroactive to the beginning of this fiscal year. Ashland Coal's
operating income totaled $14 million for the quarter ended March 31,
1995. Earnings improved this quarter, as results for last year's
second quarter suffered from the severe winter weather in January and
February and the operational aftereffects of the seven-month strike
by the United Mine Workers (UMW), which significantly increased
mining costs for Hobet Mining, Inc. and subsidiaries of Dal-Tex Coal
Corporation. As a result of these factors, gross profit improved
$1.74 per ton in the current quarter. In addition, sales volumes were
up, but the effect was partially offset by a lower average sales
price per ton, due to the expiration of a high-priced sales contract
at the end of December 1994 and a scheduled price reduction on
another contract at the beginning of this calendar year.
Year-to-Date - For the six months ended March 31, 1995, operating
income amounted to $34 million, significantly above the same period
last year. The increase in operating income reflected a return to
more normal operations following the negative effects of the UMW
strike on last year's results, as well as the other factors described
in the quarterly comparison.
EXPLORATION
Current Quarter - Exploration reported an operating loss of $1
million for the three months ended March 31, 1995, compared to income
of $10 million for the same period last year. Continued industry-wide
weakness in natural gas prices was the principal factor contributing
to a $4 million decline in domestic operating income. Earnings from
foreign operations decreased $7 million, reflecting dry hole costs
and reduced profitability from the producing properties in Nigeria.
During the quarter, Exploration completed the drilling of the second
well in a multi-well program to evaluate the potential of recently
acquired acreage offshore Nigeria. The well encountered substantial
amounts of natural gas and a single oil column, neither of which is
commercially feasible at this time. However, Ashland and its partner
TOTAL plan to continue their geological evaluation of the area and
plan further drilling. Also during the quarter, Ashland Exploration
acquired the northern West Virginia assets of two natural gas
companies, Waco Oil & Gas, a Glenville, W. Va. firm and United
Meridian Corporation, a Houston-based company. These acquisitions
expanded the Appalachian natural gas reserve base and added to
production in the quarter.
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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EXPLORATION (continued)
Year-to-Date - For the first six months of fiscal 1995, Exploration
recorded essentially break-even results, compared to income of $21
million for the same period last year. Industry-wide deterioration in
natural gas prices was the primary cause of the $12 million decline
in domestic operating income. Earnings from foreign operations
declined $9 million, primarily as a result of the same factors
described in the quarterly comparison. However, natural gas prices
have strengthened recently, improving the outlook for Exploration.
In a development affecting Ashland, Columbia Gas Transmission and
Columbia Gas Systems recently filed reorganization plans with the U.
S. Bankruptcy Court in Delaware. The plans included a settlement
agreement entered into by Ashland Exploration and the two Columbia
companies, resolving claims between the parties. Subject to approval
by the Bankruptcy Court and other approvals and contingencies, the
negotiated agreement would provide for a $78.5 million payment to
Ashland, of which 5 percent would be withheld to potentially satisfy
the claims of non-settling producers.
GENERAL CORPORATE EXPENSES
For the six months ended March 31, 1995, general corporate expenses
totaled $45 million, compared to $42 million last year. Reflected in
this year's results was reduced incentive compensation costs, while
the prior year's second quarter included a gain resulting from the
refinancing of certain subsidiary notes, partially offset by an
increase in litigation reserves.
OTHER INCOME (EXPENSE)
Interest expense was up $12 million for the quarter and $21 million
for the six months ended March 31, 1995, reflecting the increases in
both short-term and long-term debt outstanding, the additional
obligations resulting from the consolidation of Ashland Coal and
higher interest rates on floating-rate debt.
Equity income from Arch Mineral decreased $4 million for the quarter
but increased $7 million for the six months ended March 31, 1995. The
decrease in earnings for the quarter was due primarily to lower
realizations per ton, reflecting both reduced contract prices and
weak spot market prices resulting from the mild winter weather. In
addition, mining costs per ton were up, reflecting adverse geological
conditions, rail transportation problems and other production related
difficulties. Earnings for the year-to-date period improved,
primarily reflecting the negative effects of the UMW strike on last
year's results. In addition, higher sales and production tons this
year reflect the acquisition of the AgipCoal properties on January
31, 1994.
FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to continue investment
grade ratings on its indebtedness and obtain capital for its
financing needs. Ashland's senior debt ratings are Baa1 from Moody's
and BBB from Standard & Poor's. Ashland has revolving credit
agreements providing for up to $370 million in borrowings, none of
which were in use at March 31, 1995. Additionally, Ashland Coal has
revolving credit agreements providing for up to $500 million in
borrowings, of which $50 million was in use at March 31, 1995.
Ashland recently filed an amendment to its shelf registration
statement with the
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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LIQUIDITY (continued)
Securities and Exchange Commission to allow for offerings from time
to time of up to $200 million in medium-term notes and $100 million
in shares of Ashland Common Stock, with the net proceeds of the
offerings to be used for general corporate purposes. Ashland also has
access to various uncommitted lines of credit and commercial paper
markets, under which short-term notes and commercial paper of $255
million were outstanding at March 31, 1995. Although certain debt
agreements contain covenants restricting the amount by which Ashland
can increase its indebtedness, Ashland's indebtedness could have been
increased by up to $969 million at March 31, 1995.
Cash and cash equivalents at March 31, 1995, were $60 million,
compared to $40 million at September 30, 1994. Cash flows from
operations, a major source of Ashland's liquidity, amounted to $129
million for the six months ended March 31, 1995, compared to $299
million for the six months ended March 31, 1994. This decrease was
attributed primarily to lower earnings this year and an increase in
working capital requirements.
Working capital at March 31, 1995, was $480 million, compared to $483
million at September 30, 1994, and $449 million at March 31, 1994.
Liquid assets (cash, cash equivalents and accounts receivable) as a
percent of current liabilities amounted to 72% at March 31, 1995,
compared to 81% at September 30, 1994, and 78% at March 31, 1994.
Ashland's working capital is significantly affected by its use of the
LIFO method of inventory valuation, which valued such inventories at
$405 million below their replacement costs at March 31, 1995.
CAPITAL RESOURCES
For the six months ended March 31, 1995, property additions amounted
to $218 million, compared to $153 million for the same period last
year, reflecting higher spending levels by the energy and chemical
businesses, including $23 million resulting from the consolidation of
Ashland Coal in 1995. Property additions (including exploration costs
and geophysical expenses) and cash dividends for the remainder of
1995 are estimated at $306 million and $48 million, respectively.
Ashland anticipates meeting its 1995 capital requirements for
property additions and dividends primarily from internally generated
funds. However, external financing may be necessary to provide funds
for the remaining contractual maturities of $48 million for long-term
debt or for acquisitions.
Ashland's capitalization at March 31, 1995, consists of debt due
within one year (8%), long-term debt (45%), deferred income taxes
(3%), minority interest (4%), convertible preferred stock (7%), and
common stockholders' equity (33%). Total debt as a percent of total
capitalization was 53% at March 31, 1995, compared to 48% at
September 30, 1994, reflecting this year's acquisitions and the
consolidation of Ashland Coal. At March 31, 1995, long-term debt
included $77 million of floating-rate debt, and the interest rates on
an additional $380 million of fixed-rate debt were converted to
floating rates through interest rate swaps. As a result, interest
costs will fluctuate with short-term interest rates in 1995 on 24% of
Ashland's long-term debt.
ENVIRONMENTAL MATTERS
Federal, state and local statutes 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 trend toward greater environmental
awareness and increasingly stringent environmental regulations,
Ashland believes that expenditures for environmental compliance will
continue to have a significant effect on the conduct of its
businesses. Although it cannot predict accurately how these
developments will affect future operations and earnings, Ashland does
not believe
14
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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ENVIRONMENTAL MATTERS (continued)
the nature and significance of its costs will vary significantly from
those of its competitors in the petroleum and chemical industries.
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 remedial technology, and the number and financial
strength of other potentially responsible parties at multiparty
sites. As a result, charges to income for environmental liabilities
could have a material effect on results of operations in a particular
quarter or fiscal year as assessments and remediation efforts proceed
or as new remediation sites are identified. However, such charges are
not expected to have a material adverse effect on Ashland's
consolidated financial position, cash flow or liquidity.
15
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings - (1) As of March 31, 1995, Ashland was
subject to 79 notices received from the USEPA identifying Ashland as
a "potentially responsible party" ("PRP") under CERCLA and the
Superfund Amendment and Reauthorization Act ("SARA") for potential
joint and several liability for cleanup costs in connection with
alleged releases of hazardous substances from various waste treatment
or disposal sites. These sites are currently subject to ongoing
investigation and remedial activities, overseen by the USEPA in
accordance with procedures established under CERCLA and SARA
regulations, in which Ashland may be participating as a member of
various PRP groups. Generally, the type of relief sought by the USEPA
includes remediation of contaminated soil and/or groundwater,
reimbursement for the costs of site cleanup or oversight expended by
the USEPA, and/or long-term monitoring of environmental conditions at
the sites. Ashland also receives notices from state environmental
agencies pursuant to similar state legislation. Ashland carefully
monitors the investigatory and remedial activity at many of these
sites. Based on its experience with site remediation, its familiarity
with current environmental laws and regulations, its analysis of the
specific hazardous substances at issue, the existence of other
financially viable PRPs and its current estimates of investigatory,
clean-up and monitoring costs at each site, Ashland believes that its
liability at these sites, either individually or in the aggregate,
after taking into account established reserves, will not have a
material adverse effect on Ashland's consolidated financial position,
cash flow or liquidity but could have a material adverse effect on
results of operations in a particular quarter or fiscal year.
Estimated costs for these matters are recognized in accordance with
generally accepted accounting principles governing probability and
the ability to reasonably estimate future costs.
(2) Ashland received a Notice of Potential Liability from the
Commonwealth of Pennsylvania regarding a crude oil spill incident in
the Delaware River in July 1994 involving the M/V Kentucky, which
Ashland owns and charters under a long-term bareboat charter to third
parties. Ashland is having discussions with the Commonwealth of
Pennsylvania on this matter.
(3) In connection with a demand for penalty received on December 19,
1994, Ashland has received draft Stipulation Agreements from the
Minnesota Pollution Control Agency relating to various alleged
environmental regulatory violations relating to hazardous waste and
water quality and spill matters at Ashland's St. Paul Park refinery.
Ashland is having discussions with the Minnesota Pollution Control
Agency on this matter.
(4) Ashland is currently negotiating a settlement with the Kentucky
Natural Resources and Environmental Protection Cabinet of various
alleged violations of Kentucky air quality regulations occurring at
Ashland's Catlettsburg refinery during the period from December 1992
to December 1994.
(5) On or about April 21, 1995, Ashland received an Administrative
Complaint and a Notice of Proposed Assessment of Administrative Civil
Penalty from the United States Environmental Protection Agency Region
IV. The Complaint alleges that Ashland missed its April 1, 1994
interim construction deadline and maintained insufficient records
regarding construction of a waste sewer system at its Catlettsburg,
Kentucky refinery. The EPA is seeking an Administrative civil penalty
of $162,500 for these alleged violations.
El Paso Dispute - On March 11, 1993, a complaint was filed by El Paso
Refinery, L.P., against Scurlock Permian Corporation ("SPC"), a
wholly owned subsidiary of Ashland, in the District Court of El Paso
County, Texas. El Paso Refinery, L.P., is currently in Chapter 7
bankruptcy. Plaintiff alleged that SPC wrongfully breached certain
duties under a contract to supply crude oil. Plaintiff further
alleged violations of Texas usury law, common law fraud and duress
and sought substantial damages. During the March quarter, an
agreement was reached with the trustee for El Paso Refining, L.P. to
settle all outstanding disputes and claims between it, SPC and
Ashland that arise out of the complaint filed in the District Court
of El Paso County, TX. The settlement agreement also resolved all
claims between El Paso Refinery, L.P. and SPC (a creditor in the El
Paso bankruptcy proceeding) arising out of the bankruptcy proceeding
except for an approximately $10.7 million preference judgment against
SPC which was entered during the March quarter. SPC is appealing the
preference judgment.
In an apparent companion case also filed on March 11, 1993 by
individual plaintiffs (two officers of El Paso Refining, Inc., the
general partner of El Paso Refinery, L.P.), damages are sought
against SPC and others based upon the execution by plaintiffs of
promissory notes in connection with the financing of the refinery.
Ashland and SPC believe the complaint to be without merit and intend
to defend it vigorously.
16
ITEM 6. ITEM EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 April 28, 1995 /s/ Kenneth L. Aulen
---------------------------------
Kenneth L. Aulen
Administrative Vice President and
Controller (Chief Accounting Officer)
Date April 28, 1995 /s/ Thomas L. Feazell
---------------------------------
Thomas L. Feazell
Senior Vice President,
General Counsel and Secretary
5
