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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
1000 Ashland Drive
Russell, Kentucky 41169
Telephone Number: (606) 329-3333
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__
No ____
At July 31, 1997, there were 74,666,095 shares of
Registrant's Common Stock outstanding. One Right to purchase
one-thousandth of a share of Series A Participating
Cumulative Preferred Stock accompanies each outstanding share
of Registrant's Common Stock.
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PART I - FINANCIAL INFORMATION
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Nine months ended
June 30 June 30
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(In millions except per share data) 1997 1996 1997 1996
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REVENUES
Sales and operating revenues (including excise taxes) $ 3,452 $ 3,429 $ 9,956 $ 9,459
Other 16 13 49 56
---------- ---------- ---------- ----------
3,468 3,442 10,005 9,515
COSTS AND EXPENSES
Cost of sales and operating expenses 2,567 2,627 7,628 7,289
Excise taxes on products and merchandise 253 245 748 734
Selling, general and administrative expenses 341 332 1,001 951
Depreciation, depletion and amortization 98 92 294 277
---------- ---------- ---------- ----------
3,259 3,296 9,671 9,251
---------- ---------- ---------- ----------
OPERATING INCOME 209 146 334 264
OTHER INCOME (EXPENSE)
Interest expense (net of interest income) (42) (42) (124) (128)
Equity income 11 5 27 16
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INOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY
INTEREST 178 109 237 152
Income taxes (55) (32) (79) (50)
Minority interest in earnings of subsidiaries (4) (1) (14) (7)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 119 76 144 95
Income from operations of discontinued Exploration segment - Note B 9 4 26 70 (1)
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY LOSS 128 80 170 165
Extraordinary loss on early extinguishment of debt - Note C (2) - (2) -
---------- ---------- ---------- ----------
NET INCOME 126 80 168 165
Dividends on convertible preferred stock - (5) (9) (14)
---------- ---------- ---------- ----------
INCOME AVAILABLE TO COMMON SHARES $ 126 $ 75 $ 159 $ 151
========== ========== ========== ==========
EARNINGS PER SHARE - Note F
Primary
Income from continuing operations $ 1.57 $ 1.10 $ 1.95 $ 1.26
Discontinued operations .11 .06 .36 1.08 (1)
Extraordinary loss (.02) - (.02) -
---------- ---------- ---------- ----------
Net income $ 1.66 $ 1.16 $ 2.29 $ 2.34
Assuming dull dilution
Income from continuing operations $ 1.54 $ 1.01 $ 1.90 $ 1.31
Discontinued operations .11 .05 .33 .92
Extraordinary loss (.02) - (.02) -
---------- ---------- ---------- ----------
Net income $ 1.63 $ 1.06 $ 2.21 $ 2.23
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .825 $ .825
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(1) Includes a net gain of $48 million or 74 cents a share resulting from
the settlement of Ashland Exploration's (now known as Blazer Energy)
claims in the bankruptcy reorganization of Columbia Gas Transmission
and Columbia Gas Systems.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30 September 30 June 30
(In millions) 1997 1996 1996
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 116 $ 77 $ 71
Accounts receivable 1,636 1,648 1,685
Allowance for doubtful accounts (27) (27) (27)
Construction completed and in progress 47 50 54
Inventories - Note A 763 708 763
Deferred income taxes 106 113 104
Other current assets 106 96 113
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2,747 2,665 2,763
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates 169 157 155
Investments of captive insurance companies 164 178 194
Cost in excess of net assets of companies acquired 150 120 123
Net assets of Exploration segment held for sale 334 319 318
Other noncurrent assets 335 358 361
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1,152 1,132 1,151
PROPERTY, PLANT AND EQUIPMENT
Cost 6,475 6,285 6,219
Accumulated depreciation, depletion and amortization (3,207) (3,000) (3,026)
---------- --------- ----------
3,268 3,285 3,193
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$ 7,167 $ 7,082 $ 7,107
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Debt due within one year $ 362 $ 203 $ 404
Trade and other payables 1,824 1,973 1,819
Income taxes 23 22 24
---------- --------- ----------
2,209 2,198 2,247
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,710 1,784 1,752
Employee benefit obligations 609 601 602
Reserves of captive insurance companies 170 166 181
Deferred income taxes 52 28 18
Other long-term liabilities and deferred credits 312 317 350
Commitments and contingencies - Note E
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2,853 2,896 2,903
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
182 174 175
STOCKHOLDERS' EQUITY
Convertible preferred stock - 293 293
Common stockholders' equity 1,923 1,521 1,489
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1,923 1,814 1,782
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$ 7,167 $ 7,082 $ 7,107
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
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Preferred Common Paid-in Retained Loan to
(In millions) stock stock capital earnings LESOP Other Total
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BALANCE AT OCTOBER 1, 1995 $ 293 $ 64 $ 256 $ 1,063 $ (11) $ (10) $ 1,655
Net income 165 165
Dividends
Preferred stock (14) (14)
Common stock (53) (53)
Issued common stock under
Stock incentive plans 1 18 19
Employee savings plan 3 3
LESOP loan repayment 11 11
Other changes (4) (4)
------- --------- -------- --------- -------- ------- --------
BALANCE AT JUNE 30, 1996 $ 293 $ 65 $ 277 $ 1,161 $ - $ (14) $ 1,782
======= ========= ======== ========= ======== ======= ========
BALANCE AT OCTOBER 1, 1996 $ 293 $ 64 $ 280 $ 1,185 $ - $ (8) $ 1,814
Net income 168 168
Dividends
Preferred stock (9) (9)
Common stock (56) (56)
Issued common stock under
Preferred stock conversion (290) 9 281 -
Stock incentive plans 1 25 26
Employee savings plan 1 1
Preferred stock redemption (3) (3)
Other changes (18) (18)
------- --------- -------- --------- -------- ------- --------
BALANCE AT JUNE 30, 1997 $ - $ 74 $ 587 $ 1,288 $ - $ (26) $ 1,923
======= ========= ======== ========= ======== ======= ========
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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Nine months ended
June 30
--------------------------------
(In millions) 1997 1996
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CASH FLOWS FROM CONTINUING OPERATIONS
Income from continuing operations $ 144 $ 95
Expense (income) not affecting cash
Depreciation, depletion and amortization 294 277
Deferred income taxes 28 (10)
Other noncash items 14 1
Change in operating assets and liabilities (1) (143) (91)
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337 272
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 87 11
Proceeds from issuance of capital stock 19 16
Loan repayment from leveraged employee stock ownership plan - 11
Repayment of long-term debt (61) (97)
Increase in short-term debt 60 138
Redemption of preferred stock (3) -
Dividends paid (68) (70)
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34 9
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (266) (256)
Purchase of operations - net of cash acquired (67) (45)
Proceeds from sale of operations - 1
Investment purchases (2) (160) (403)
Investment sales and maturities (2) 151 421
Other-net - (10)
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(342) (292)
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CASH PROVIDED (USED) BY CONTINUING OPERATIONS 29 (11)
Cash provided by discontinued operations 10 30
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INCREASE IN CASH AND CASH EQUIVALENTS 39 19
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 77 52
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 116 $ 71
========= =========
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(1) Excludes changes resulting from operations acquired or sold.
(2) Represents primarily investment transactions of captive insurance companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - 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, 1996. Results of operations for
the periods ended June 30, 1997, are not necessarily indicative of
results to be expected for the year ending September 30, 1997.
INVENTORIES
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June 30 September 30 June 30
(In millions) 1997 1996 1996
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Crude oil $ 287 $ 316 $ 306
Petroleum products 318 323 345
Chemicals 377 342 358
Other products 160 146 168
Materials and supplies 55 55 57
Excess of replacement costs over LIFO carrying values (434) (474) (471)
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$ 763 $ 708 $ 763
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DERIVATIVE INSTRUMENTS
Ashland selectively uses commodity futures contracts to reduce its
exposure to certain risks inherent within its refining business.
Such contracts are used principally to hedge the value of
intransit crude oil cargoes, hedge exposure under fixed-price
sales contracts, obtain higher prices for crude oil sales, protect
against margin compression caused by increasing crude oil prices,
take advantage of attractive refining margins and lock in prices
on a portion of the natural gas fuel needs of the refineries.
Realized gains and losses on these contracts are included in cost
of sales in the original contract month, with amounts paid or
received on early terminations deferred on the balance sheet in
other current assets or trade and other payables, as appropriate
(the deferral method). In addition, trading in commodity futures
contracts is a natural extension of cash market trading and is
used as an alternate method of obtaining or selling crude oil and
petroleum products to balance physical barrel activity. These
contracts are marked-to-market each month and included in accounts
receivable, with the offsetting unrealized gain or loss included
in cost of sales (the fair value method).
Ashland uses forward exchange contracts to hedge foreign currency
transaction exposures of its operations. These contracts are
marked-to-market each month and included in trade and other
payables, with the offsetting gain or loss included in other
revenues (the fair value method). In addition, any investments of
Ashland's captive insurance companies in foreign
currency-denominated debt obligations are hedged. These contracts
are marked-to-market each month and included with the related
investments on the balance sheet. The offsetting unrealized gain
or loss is deferred in stockholders' equity. This accounting
treatment mirrors that of the underlying investments.
Ashland uses interest rate swap agreements to obtain greater
access to the lower borrowing costs normally available on
floating-rate debt, while minimizing refunding risk through the
issuance of long-term, fixed-rate debt. Each interest rate swap
agreement is designated with all or a portion of the principal
balance and term of a specific debt obligation. These agreements
involve the exchange of amounts based on a fixed interest rate for
amounts based on variable interest rates over the life of the
6
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DERIVATIVE INSTRUMENTS (CONTINUED)
agreement, without an exchange of the notional amount upon which
the payments are based. The differential to be paid or received as
interest rates change is accrued and recognized as an adjustment
of interest expense related to the debt (the accrual method). The
related amount payable to or receivable from counterparties is
included in trade and other payables. The fair values of the swap
agreements are not recognized in the financial statements. Gains
and losses on terminations of interest rate swap agreements are
deferred on the balance sheet (in other long-term liabilities) and
amortized as an adjustment to interest expense related to the debt
over the remaining term of the original contract life of the
terminated swap agreement. In the event of the early
extinguishment of a designated debt obligation, any realized or
unrealized gain or loss from the swap would be recognized in
income coincident with the extinguishment.
NOTE B - DISCONTINUED OPERATIONS
On July 1, 1997, Ashland completed the sale of Blazer Energy
Corporation, its domestic exploration and production subsidiary,
to The Eastern Group, Inc., a U.S. energy management subsidiary of
Statoil, a Norwegian energy company. Sales proceeds of $566
million will result in a significant gain in the September 1997
quarter. Ashland continues to pursue the sale of its international
exploration and production operations and is presently working
with the Nigerian authorities to resolve a dispute relating to its
production sharing contracts. Accordingly, results from the
Exploration segment are shown as discontinued operations with
prior periods restated.
Components of amounts reflected in the income statements and
balance sheets for the discontinued Exploration segment are as
follows:
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Three months ended Nine months ended
June 30 June 30
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(In millions) 1997 1996 1997 1996
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INCOME STATEMENTS
Revenues $ 62 $ 52 $ 216 $ 251
Costs and expenses (53) (50) (191) (159)
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Operating income 9 2 25 92
Income tax benefit (expense) - 2 1 (22)
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Net income $ 9 $ 4 $ 26 $ 70
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June 30 September 30 June 30
(In millions) 1997 1996 1996
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BALANCE SHEETS
Current assets $ 74 $ 76 $ 64
Investments and other assets 8 1 1
Property, plant and equipment - net 430 430 397
Current liabilities (67) (81) (51)
Noncurrent liabilities (111) (107) (93)
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Net assets held for sale $ 334 $ 319 $ 318
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7
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - EXTRAORDINARY LOSS
On June 3, 1997, Ashland called for redemption all its outstanding
6.75% Convertible Subordinated Debentures due 2014. On July 3,
1997, $123 million of the Debentures were redeemed for 101.35% of
the principal amount, plus accrued interest, thereby eliminating
an associated 2.4 million shares of Ashland Common Stock that had
been reserved for conversion. The redemption premium and writeoff
of unamortized deferred debt issuance expenses resulted in a
pretax charge of $3 million in the quarter ended June 30, 1997.
Net of $1 million in income tax benefits, the charge resulted in
an extraordinary loss of $2 million on this early extinquishment
of debt.
NOTE D - ACQUISITIONS
During the nine months ended June 30, 1997, Ashland Chemical
acquired various distribution and specialty chemical businesses
and APAC acquired two construction businesses. These acquisitions
were accounted for as purchases and did not have a significant
effect on Ashland's consolidated financial statements.
NOTE E - LITIGATION, CLAIMS AND CONTINGENCIES
Federal, state and local statutes and regulations relating to the
protection of the environment have a significant impact on the
conduct of Ashland's businesses. For information regarding
environmental expenditures and reserves, see the "Miscellaneous -
Governmental Regulation and Action - Environmental Protection"
section of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties
which affect Ashland's ability to estimate its share of the
ultimate costs of required remediation efforts. Such uncertainties
involve the nature and extent of contamination at each site, the
extent of required cleanup efforts under existing environmental
regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number
and financial strength of other potentially responsible parties at
multiparty sites. As a result, charges to income for environmental
liabilities could have a material effect on results of operations
in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are
identified. However, such charges are not expected to have a
material adverse effect on Ashland's consolidated financial
position.
Ashland has numerous insurance policies that provide coverage at
various levels for environmental costs. In addition, various costs
of remediation efforts related to underground storage tanks are
eligible for reimbursement from state administered funds.
During 1996, the U.S. Environmental Protection Agency (EPA)
notified Ashland that its three refineries would be subject to a
comprehensive inspection of compliance with federal environmental
laws and regulations. The inspections have been completed and are
currently under review by the EPA and Ashland. Such inspections
could result in sanctions, monetary penalties and further remedial
expenditures. Also during 1996, Ashland arranged for an
independent review of environmental compliance at its three
refineries by an outside consulting firm, self-reported to the EPA
a number of issues of non-compliance with applicable laws or
regulations, and commenced a program to address these matters.
Ashland is not in a position to determine what actions, if any,
may be instituted and is similarly uncertain at this time what
additional remedial actions may be required or costs incurred.
However, this matter is not expected to have a material adverse
effect on Ashland's consolidated financial position.
In addition to environmental matters, Ashland and its subsidiaries
are parties to numerous claims and lawsuits (some of which are for
substantial amounts). While these actions are being contested, the
outcome of individual matters is not predictable with assurance.
Although any actual liability is not
8
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE E - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
determinable as of June 30, 1997, Ashland believes that any
liability resulting from these matters, after taking into
consideration Ashland's insurance coverages and amounts already
provided for, should not have a material adverse effect on
Ashland's consolidated financial position.
NOTE F - COMPUTATION OF EARNINGS PER SHARE
In March 1997, Ashland called for redemption the 6 million
outstanding shares of its $3.125 Cumulative Convertible Preferred
Stock. Each preferred share was convertible into 1.546 shares of
Ashland Common Stock, plus cash for fractional shares. Almost 99%
of the series was submitted for conversion to common stock by the
March 31 deadline. The remaining preferred shares were redeemed at
a price of $51.88 per share plus 19.1 cents per share of accrued
and unpaid dividends.
In the computation of earnings per share assuming full dilution
for the nine months ended June 30, 1997, the preferred shares were
assumed to be converted to common shares as of the beginning of
the period, in accordance with generally accepted accounting
principles. If the shares had been assumed converted as of the
beginning of the period for the primary computation, the resulting
primary earnings per share would have amounted to $2.23.
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Three months ended Nine months ended
June 30 June 30
---------------------- -----------------------
(In millions except per share data) 1997 1996 1997 1996
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PRIMARY EARNINGS PER SHARE
Income available to common shares
Net income $ 126 $ 80 $ 168 $ 165
Dividends on convertible preferred stock - (5) (9) (14)
--------- --------- --------- ---------
$ 126 $ 75 $ 159 $ 151
========= ========= ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 74 64 68 64
Common shares issuable upon exercise of stock options 1 1 1 1
--------- --------- --------- ---------
75 65 69 65
========= ========= ========= =========
Earnings per share $ 1.66 $ 1.16 $ 2.29 $ 2.34
========= ========= ========= =========
EARNINGS PER SHARE
ASSUMING FULL DILUTION
Income available to common shares
Net income $ 126 $ 80 $ 168 $ 165
Interest on convertible debentures (net of income taxes) 1 1 4 4
--------- --------- --------- ---------
$ 127 $ 81 $ 172 $ 169
========= ========= ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 74 64 68 64
Common shares issuable upon
Exercise of stock options 1 1 1 1
Conversion of debentures 3 3 3 2
Conversion of preferred stock - 9 6 9
--------- --------- --------- ---------
78 77 78 76
========= ========= ========= =========
Earnings per share $ 1.63 $ 1.06 $ 2.21 $ 2.23
========= ========= ========= =========
9
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended Nine months ended
June 30 June 30
---------------------------- -----------------------------
(Dollars in millions except as noted) 1997 1996 1997 1996
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SALES AND OPERATING REVENUES
Refining and Marketing (1) $ 1,668 $ 1,713 $ 5,029 $ 4,734
Valvoline 297 350 827 890
Chemical 1,065 958 3,005 2,752
APAC 347 356 843 866
Coal 153 137 465 440
Intersegment sales (78) (85) (213) (223)
----------- ----------- ----------- -----------
$ 3,452 $ 3,429 $ 9,956 $ 9,459
=========== =========== =========== ===========
OPERATING INCOME
Refining and Marketing (1) $ 96 $ 53 $ 97 $ 72
Valvoline 30 37 67 57
Chemical 51 47 118 127
APAC 29 29 48 53
Coal 15 8 44 30
General corporate expenses (12) (28) (40) (75)
----------- ----------- ----------- -----------
$ 209 $ 146 $ 334 $ 264
=========== =========== =========== ===========
EQUITY INCOME
Arch Mineral Corporation $ 6 $ 3 $ 16 $ 8
Other 5 2 11 8
----------- ----------- ----------- -----------
$ 11 $ 5 $ 27 $ 16
=========== =========== =========== ===========
OPERATING INFORMATION
Refining and Marketing (1)
Refining inputs (thousand barrels per day) (2) 367.8 376.0 358.7 365.7
Value of products manufactured per barrel $ 25.12 $ 26.54 $ 26.86 $ 24.06
Input cost per barrel 19.14 21.74 22.26 19.86
----------- ----------- ----------- -----------
Refining margin per barrel $ 5.98 $ 4.80 $ 4.60 $ 4.20
Refined product sales (thousand barrels per day)
Wholesale sales to
Ashland brand retail jobbers 21.5 18.0 22.8 16.1
Other wholesale customers (3) 302.3 302.9 289.3 296.2
SuperAmerica retail system 77.1 74.8 75.8 73.7
----------- ----------- ----------- -----------
Total refined product sales 400.9 395.7 387.9 386.0
SuperAmerica merchandise sales $ 157 $ 152 $ 439 $ 425
Valvoline lubricant sales (thousand barrels per day) (3) 19.9 19.9 18.7 19.3
APAC construction backlog
At end of period $ 701 $ 663 $ 701 $ 663
Increase (decrease) during period $ 47 $ (1) $ 54 $ (9)
Ashland Coal, Inc. (4)
Tons sold (millions) 6.0 5.3 18.2 16.6
Sales price per ton $ 25.64 $ 25.78 $ 25.59 $ 26.59
Arch Mineral Corporation (4)
Tons sold (millions) 7.6 7.3 22.9 21.5
Sales price per ton $ 25.10 $ 25.31 $ 25.15 $ 25.36
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Segments formerly identified as Petroleum and SuperAmerica have been
combined effective October 1, 1996. Prior year amounts have been restated.
(2) Includes crude oil and other purchased feedstocks.
(3) Includes intersegment sales.
(4) Ashland's ownership interest at June 30, 1997, was 57% in Ashland Coal and 50% in Arch Mineral.
10
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
Current Quarter - Ashland recorded net income of $126 million for
the three months ended June 30, 1997, compared to $80 million for
the same period last year. Operating income equaled $209 million
in the current quarter compared to $146 million in last year's
third quarter. Excluding unusual items in prior periods, the June
quarter was the best in the company's history in terms of net
income and operating income. The increase in earnings was due
primarily to substantial improvements from Refining and Marketing
operations.
Year-to-Date - Ashland recorded net income of $168 million for the
nine months ended June 30, 1997. This compares to net income of
$165 million for the same period last year, which included net
income of $48 million from the settlement of Ashland Exploration's
(now known as Blazer Energy) claims in the bankruptcy
reorganization of Columbia Gas Transmission and Columbia Gas
Systems. Operating income equaled $334 million in the first nine
months of 1997, compared to $264 million for the same period last
year, reflecting improvements in Refining and Marketing, Valvoline
and Ashland Coal.
Effective October 1, 1996, Ashland changed its methodology for
allocating corporate general and administrative (G&A) expenses.
For purposes of comparison to prior year results, segment
operating income for the current quarter and year-to-date periods
have been adjusted in the following table to exclude the increased
allocations.
Three months ended Nine months ended
June 30 June 30
---------------------------- -----------------------------
(In millions) 1997 1996 1997 1996
-----------------------------------------------------------------
OPERATING INCOME
Refining and Marketing $ 100 $ 53 $ 111 $ 72
Valvoline 31 37 71 57
Chemical 54 47 126 127
APAC 31 29 51 53
Coal 15 8 44 30
General corporate expenses (22) (28) (71) (75)
----------- ----------- ----------- -----------
$ 209 $ 146 $ 332 $ 264
=========== ========== =========== ===========
REFINING AND MARKETING
Also effective October 1, 1996, Ashland began reporting the
results of Ashland Petroleum, its refining division, and
SuperAmerica retail gasoline marketing operations as a single
industry segment to allow for better peer group comparisons. Prior
year results have been restated.
Current Quarter - Refining and Marketing reported operating income
of $96 million for the June 1997 quarter compared to $53 million
for the June 1996 quarter. The 79% increase was primarily the
result of a $1.18 per barrel improvement in the refining margin
(the difference between the value of products manufactured and
input cost), reflecting lower crude oil costs. Wholesale product
prices were favorable, particularly for asphalt. The improvement
was further enhanced by a 21(cent) per barrel decrease in refining
expenses, despite slightly lower throughput. Results for retail
marketing operations were also up substantially, reflecting a
significant increase in retail gasoline margins, as well as
improved merchandise margins and higher gasoline and merchandise
volumes.
Year-to-Date - Refining and Marketing reported operating income of
$97 million for the nine months ended June 30, 1997, compared to
$72 million for the first nine months of fiscal 1997. The increase
in earnings reflects a 40(cent) per barrel improvement in the
refining margin. Inputs were down slightly for the nine months
this year due to a maintenance turnaround at the Catlettsburg,
Ky., refinery and heavy flooding in the Ohio Valley during the
second quarter, which limited the ability to ship products on the
river. Refining expenses for the first nine months of fiscal 1997
declined 28(cent) per barrel compared to the nine months last
year, despite the lower throughput, also contributing to the
earnings improvement.
11
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -----------------------------------------------------------------------------
REFINING AND MARKETING (CONTINUED)
Scurlock Permian was adversely affected by lower margins on crude
oil sales, reflecting increased competition in the domestic crude
oil markets. Modest increases in retail sales volumes and margins
for both gasoline and merchandise were offset by a rise in
expenses.
The Ashland brand jobber program continues to expand, though at a
considerably slower pace since Ashland's announcement on May 15 of
the pending joint venture with USX's Marathon group (see
"Profitability Improvement Plan" on page 16). During the first
nine months of the year, 81 more units were opened, bringing the
total number of units to 566 at June 30, 1997, compared to 365
units in operation at June 30, 1996. SuperAmerica opened 19 new
and 8 rebuilt units to bring the total number of units to 755 at
June 30, 1997, including 630 SuperAmerica stores and 125 Rich
outlets. At June 30, 1996, there were 627 SuperAmerica stores and
103 Rich outlets in operation.
VALVOLINE
Current Quarter - Valvoline reported operating income of $30
million for the quarter ended June 30, 1997, compared to $37
million for the quarter ended June 30, 1996. Due to the extremely
cool spring, sales volumes of R-12 automotive refrigerant
declined, which led to the lower overall results for the quarter.
This decline was partially offset by an improvement in the U.S.
lubricants business, reflecting good volumes and better margins.
Year-to-Date - For the nine months ended June 30, 1997, Valvoline
posted record operating income of $67 million. This compares to
operating income of $57 million for the same period last year. The
improvement in earnings reflected higher U.S. lubricant, R-12
refrigerant and antifreeze margins. First Recovery reported
improved results primarily due to higher used oil collection
revenues.
CHEMICAL
Current Quarter - Ashland Chemical had a record June quarter with
operating income of $51 million, compared to $47 million for the
third quarter of 1996. Results from petrochemicals improved
significantly from a weak third quarter last year, and the
specialty group also had higher operating income. The combination
more than offset a margin-driven decline from the distribution
group. The increase in petrochemicals reflected improved margins
for cumene and methanol. The specialty group had an all-time
record quarter with four of the six units establishing records.
However, Drew Marine was down due to reduced sales in a very
competitive market. In the distribution group, General Polymers
and FRP Supply both had record quarters, but were more than offset
by a decline in industrial chemicals and solvents, which
experienced decreased margins due to rising material costs.
Year-to-Date - Ashland Chemical's operating income for the nine
months ended June 30, 1997, amounted to $118 million, compared to
$127 million for the first nine months of fiscal 1996. When the
increased corporate G&A allocations are eliminated, results were
essentially equal to last year. The distribution group is down, as
lower earnings in industrial chemicals and solvents and Ashland
Plastics more than offset a record nine months for General
Polymers. The specialty group had a record nine months with
foundry products, specialty polymers and adhesives, and electronic
chemicals all establishing new records. Petrochemical results are
up due to strong methanol earnings, though margins for maleic
anhydride have declined, reflecting higher raw material costs and
a very competitive market.
APAC
Current Quarter - APAC, Ashland's highway construction division,
had another record June quarter, with $29 million in operating
income, slightly exceeding last year's June quarter. These
operations performed extremely well, despite a wet spring in many
of APAC's markets. The slight improvement reflected higher profit
margins on construction jobs and aggregate plant sales, which
offset lower margins from asphalt plants.
12
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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APAC (CONTINUED)
Year-to-Date - For the nine months ended June 30, 1997, APAC
reported operating income of $48 million, compared to $53 million
for the same period last year. The decline was the result of
adverse weather conditions in several of APAC's operating areas in
the December 1996 quarter, increased corporate G&A allocations
during the current fiscal year, and a gain on an aggregate
property sale in the December 1995 quarter. The construction
backlog at June 30, 1997, amounted to a record $701 million,
compared to $663 million at June 30, 1996.
COAL
Current Quarter - Operating income for Ashland Coal nearly doubled
to $15 million for the June 1997 quarter, compared to $8 million
for the June 1996 quarter, despite decreased sales realizations
per ton. The improvement was driven by increased sales and
production tonnage and reduced mining costs resulting from the
relocation of two major draglines and more favorable overburden
ratios.
Year-to-Date - Operating income for Ashland Coal increased to $44
million for the nine months ended June 30, 1997, compared to $30
million for the same period last year. The increase was generally
due to the same factors discussed in the current quarter
comparison above.
Ashland Coal and Arch Mineral merged on July 1, 1997, into a new
corporation known as Arch Coal, Inc. Ashland is the majority
shareholder of the new company, with a 54% ownership interest.
Beginning in the September 1997 quarter, Arch Coal will be
consolidated in Ashland's financial statements. Prior interim
quarters in 1997 will be restated to reflect Arch Mineral on a
consolidated basis for comparison purposes. Arch Mineral is
currently accounted for under the equity method.
In the September quarter of 1997, Arch Coal anticipates recording
a one-time charge related to the merger, including severance costs
and the writedown of duplicate facilities. Also, the longwall
reserve base at the company's Arch of Kentucky Mine No. 37 in
Harlan County, Ky., will be exhausted near the end of the quarter,
and its substantial contribution to earnings will be lost. After
exhaustion of the longwall reserves, production at Mine No. 37
will be substantially reduced, but the development of a new
underground mine in the Darby seam near the No. 37 Mine is being
evaluated to partially offset the lost production. Furthermore,
the September quarter is traditionally the weakest for the company
due to miners' vacations and higher than normal maintenance costs.
GENERAL CORPORATE EXPENSES
General corporate expenses were $12 million in the current
quarter, compared to $28 million in the prior year's quarter.
Comparable amounts for the nine months periods were $40 million
for 1997 versus $75 million for 1996. The decrease was due
primarily to increased allocations to the operating divisions in
1997.
OTHER INCOME (EXPENSE)
For the nine months ended June 30, 1997, interest expense (net of
interest income) totaled $124 million, compared to $128 million
for the 1996 period. The decline reflected a decrease in the
average outstanding debt level during the December quarter and
lower interest rates resulting from certain long-term debt
refinancings.
Equity income from Arch Mineral for the quarter ended June 30,
1997, amounted to $6 million, compared to $3 million for the June
1996 quarter. Equity income from Arch for the nine months ended
June 30, 1997, amounted to $16 million, compared to $8 million for
the same period last year. The increases in both comparisons
reflected higher sales and production tonnage and reduced
administrative and interest costs. See the discussion regarding
the merger of Arch Mineral and Ashland Coal above.
13
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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DISCONTINUED OPERATIONS
On July 1, 1997, Ashland completed the sale of Blazer Energy
Corporation, its domestic exploration and production subsidiary,
to The Eastern Group, Inc., a U.S. energy management subsidiary of
Statoil, a Norwegian energy company. Sales proceeds of $566
million will result in a significant gain in the September
quarter. Ashland continues to pursue the sale of its international
exploration and production operations and is presently working
with the Nigerian authorities to resolve a dispute relating to its
production sharing contracts. Accordingly, results from the
Exploration segment are shown as discontinued operations with
prior periods restated (see Note B to the financial statements).
Current Quarter - Net income from Exploration amounted to $9
million for the quarter ended June 30, 1997, compared to $4
million for the same period in 1996. The improvement reflects a
19% increase in domestic natural gas production, as new wells from
the Vermilion 410 and 389 blocks in the Gulf of Mexico began
production in the first and second quarters of fiscal 1997.
Year-to-Date - Net income from Exploration amounted to $26 million
for the nine months ended June 30, 1997, compared to $70 million
for the same period in 1996. Excluding the previously mentioned
$48 million in net income resulting from the Columbia Gas
settlement in 1996, the $4 million improvement over last year
reflects a 12% increase in natural gas prices and a 10% increase
in natural gas volumes resulting from the new Gulf of Mexico
production discussed above. Partially offsetting these
improvements was an $8 million pretax charge in the March 1997
quarter resulting from a litigation settlement and remediation
expenses related to certain nonproducing properties.
EXTRAORDINARY LOSS
On June 3, 1997, Ashland called for redemption all its outstanding
6.75% Convertible Subordinated Debentures due 2014. On July 3,
1997, $123 million of the Debentures were redeemed for 101.35% of
the principal amount, plus accrued interest, thereby eliminating
an associated 2.4 million shares of Ashland Common Stock that had
been reserved for conversion. The redemption premium and writeoff
of unamortized deferred debt issuance expenses resulted in a
pretax charge of $3 million in the quarter ended June 30, 1997.
Net of $1 million in income tax benefits, the charge resulted in
an extraordinary loss of $2 million on this early extinquishment
of debt.
FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to obtain capital for
its financing needs and to maintain investment grade ratings on
its senior debt. On February 3, 1997, Moody's Investors Service
lowered the rating on Ashland's senior debt from Baa1 to Baa2, a
level equivalent to the company's BBB senior debt rating from
Standard & Poor's. Ashland has a revolving credit agreement
providing for up to $320 million in borrowings, under which no
borrowings were outstanding at June 30, 1997. At July 1, 1997,
Arch Coal also had revolving credit agreements providing for up to
$500 million in borrowings, none of which were in use. Under a
shelf registration, Ashland can issue an additional $220 million
in medium-term notes should future opportunities or needs arise.
Ashland and Arch Coal also have access to various uncommitted
lines of credit and commercial paper markets, under which
short-term notes of $177 million were outstanding at June 30,
1997.
Cash flows from continuing operations, a major source of Ashland's
liquidity, amounted to $337 million for the nine months ended June
30, 1997, compared to $272 million for the nine months ended June
30, 1996. This increase was attributed primarily to the higher
level of earnings.
Working capital at June 30, 1997, was $538 million, compared to
$467 million at September 30, 1996, and $516 million at June 30,
1996. Liquid assets (cash, cash equivalents and accounts
receivable) amounted to 78% of current liabilities at June 30,
1997, and 77% at September 30, 1996. Ashland's
14
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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LIQUIDITY (CONTINUED)
working capital is significantly affected by its use of the LIFO
method of inventory valuation, which valued inventories $434
million below their replacement costs at June 30, 1997.
CAPITAL RESOURCES
For the nine months ended June 30, 1997, property additions
amounted to $266 million, compared to $256 million for the same
period last year. Property additions and cash dividends for the
remainder of fiscal 1997 are estimated at $208 million and $26
million, respectively. Ashland anticipates meeting its remaining
1997 capital requirements for property additions, dividends and
$25 million in contractual maturities of long-term debt from
internally generated funds.
Ashland's capital employed at June 30, 1997, consisted of debt
(49%), deferred income taxes (1%), minority interest (4%), and
common stockholders' equity (46%). Debt as a percent of capital
employed was 49% at June 30, 1997, compared to 50% at September
30, 1996. At June 30, 1997, long-term debt included $48 million of
floating-rate debt, and the interest rates on an additional $465
million of fixed-rate debt had been converted to floating rates
through interest rate swap agreements.
ENVIRONMENTAL MATTERS
Federal, state and local laws and regulations relating to the
protection of the environment have resulted in higher operating
costs and capital investments by the industries in which Ashland
operates. Because of the continuing trends toward greater
environmental awareness and ever increasing regulations, Ashland
believes that expenditures for environmental compliance will
continue to have a significant effect on the conduct of its
businesses. Although it cannot accurately predict how such trends
will affect future operations and earnings, Ashland believes the
nature and significance of its ongoing compliance costs will be
comparable to those of its competitors in the petroleum, chemical
and extractive industries. For information on certain specific
environmental proceedings and investigations, see the "Legal
Proceedings" section of this Form 10-Q. For information regarding
environmental expenditures and reserves, see the "Miscellaneous -
Governmental Regulation and Action - Environmental Protection"
section of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties
which affect Ashland's ability to estimate its share of the
ultimate costs of required remediation efforts. Such uncertainties
involve the nature and extent of contamination at each site, the
extent of required cleanup efforts under existing environmental
regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number
and financial strength of other potentially responsible parties at
multiparty sites. As a result, charges to income for environmental
liabilities could have a material effect on results of operations
in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are
identified. However, such charges are not expected to have a
material adverse effect on Ashland's consolidated financial
position, cash flow or liquidity.
During 1996, the U.S. Environmental Protection Agency (EPA)
notified Ashland that its three refineries would be subject to a
comprehensive inspection of compliance with federal environmental
laws and regulations. The inspections have been completed and are
currently under review by the EPA and Ashland. Such inspections
could result in sanctions, monetary penalties and further remedial
expenditures. Also during 1996, Ashland arranged for an
independent review of environmental compliance at its three
refineries by an outside consulting firm, self-reported to the EPA
a number of issues of non-compliance with applicable laws or
regulations, and commenced a program to address these matters.
Ashland is not in a position to determine what actions, if any,
may be instituted and is similarly uncertain at this time what
additional remedial actions may be required or costs incurred.
However, this matter is not expected to have a material adverse
effect on Ashland's consolidated financial position.
15
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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PROFITABILITY IMPROVEMENT PLAN
Following is an update of the progress under certain steps in
Ashland's profitability improvement plan announced on December 9,
1996.
o REDUCING CAPITAL EXPENDITURES FOR REFINING. Expenditures are
being limited to $100 million for fiscal 1997, below
projected depreciation, and totaled $62 million for the first
nine months.
o AGGRESSIVELY REVIEWING OPTIONS FOR STRATEGIC ALLIANCES FOR
ASHLAND'S REFINING AND MARKETING OPERATIONS. On May 15, 1997,
Ashland and USX Corporation announced the signing of a Letter
of Intent between Ashland and USX's Marathon group to pursue
a combination of the major elements of Marathon and Ashland's
refining, marketing and transportation operations. Under the
terms of the Letter of Intent, Marathon will have a 62
percent ownership interest, and Ashland will have a 38
percent ownership interest, in the new limited liability
joint venture company, to be known as Marathon Ashland
Petroleum LLC. The transaction is subject to the negotiation
and execution of definitive documents and a closing of the
transaction is targeted for calendar year-end. The
anticipated combination requires the approval of the Boards
of Directors of Ashland, Marathon and USX and of certain
governmental agencies, as well as the satisfactory conclusion
of due diligence by the parties.
Due diligence is well under way, and negotiations have begun
on definitive agreements. Prospective senior officers of the
new company have been named; numerous teams are working on
organizational and other issues; and opportunities to improve
efficiency are being identified. Ashland remains optimistic
the transaction can be completed by the end of calendar 1997.
o EVALUATING STRATEGIC ALTERNATIVES FOR ASHLAND'S EXPLORATION
DIVISION. See the discussion under "Results of Operations -
Discontinued Operations" for a description of the sale of
Blazer Energy, which was completed on July 1, 1997.
o INCREASING CAPITAL EMPLOYED IN ASHLAND CHEMICAL, THE APAC
HIGHWAY CONSTRUCTION GROUP AND VALVOLINE. Ashland has
invested $65 million in eight acquisitions for Ashland
Chemical and two for APAC during the first nine months of the
year. These acquisitions help expand Ashland's distribution
and specialty chemical businesses in the United States and
also broaden their growing global presence, as well as
support and enhance APAC's highway construction operations.
o IMPLEMENTING A COMMON STOCK REPURCHASE PROGRAM. In December
1996, Ashland's board approved a plan to repurchase up to one
million shares of Ashland common stock annually to offset
dilution due to company benefit programs. No purchases have
occurred to date under this program. However, the redemption
of the 6.75% Convertible Subordinated Debentures in July
eliminated 2.4 million shares of Ashland Common Stock that
had been reserved for conversion. Ashland believes this
accomplishes the goals inherent in the announced common stock
repurchase program.
See the discussion under "Results of Operations - Coal" for a
description of the merger between Ashland Coal and Arch Mineral
that was completed on July 1, 1997.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Although Ashland
believes that its expectations are based on reasonable
assumptions, it cannot assure that the expectations contained in
such statements will be achieved. Important factors which could
cause actual results to differ materially from those contained in
such statements are discussed in Note A to the Consolidated
Financial Statements under risks and uncertainties in Ashland's
Annual Report for the fiscal year ended September 30, 1996. Other
factors and risks affecting Ashland's revenues and operations are
contained in Ashland's Form 10-K for the fiscal year ended
September 30, 1996, which is on file with the Securities and
Exchange Commission.
16
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings - (1) As of June 30, 1997, Ashland was subject to
77 notices received from the USEPA and similar state agencies identifying
Ashland as a "potentially responsible party" ("PRP") under Superfund or
similar state laws for potential joint and several liability for cleanup
costs in connection with alleged releases of hazardous substances from
various waste treatment or disposal sites. These sites are currently
subject to ongoing investigation and remedial activities, overseen by the
USEPA or a state agency in accordance with procedures established under
regulations, in which Ashland may be participating as a member of various
PRP groups. Generally, the type of relief sought includes remediation of
contaminated soil and/or groundwater, reimbursement for the costs of site
cleanup or oversight expended, and/or long-term monitoring of environmental
conditions at the sites. Ashland carefully monitors the investigatory and
remedial activity at many of these sites. Based on its experience with site
remediation, its familiarity with current environmental laws and
regulations, its analysis of the specific hazardous substances at issue,
the existence of other financially viable PRPs and its current estimates of
investigatory, clean-up and monitoring costs at each site, Ashland believes
that its liability at these sites, either individually or in the aggregate,
after taking into account established reserves, will not have a material
adverse effect on Ashland's consolidated financial position, cash flow or
liquidity, but could have a material adverse effect on results of
operations in a particular quarter or fiscal year. Estimated costs for
these matters are recognized in accordance with generally accepted
accounting principles governing probability and the ability to reasonably
estimate future costs. For additional information regarding Superfund, see
the "Miscellaneous - Governmental Regulation and Action-Environmental
Protection" section of Ashland's Form 10-K.
(2) On March 19, 1996, after consultation with the USEPA, the Kentucky
Division for Air Quality issued a finding that Ashland had not demonstrated
compliance with certain air regulations regarding volatile organic
compounds ("VOC") at its Catlettsburg, Kentucky refinery, and referred the
matter to USEPA - Region IV for formal enforcement action. Ashland filed a
petition requesting a hearing before a Kentucky administrative hearing
officer on the merits of the matter. A hearing was scheduled for July 1997.
However, on May 27, 1997, Kentucky and Ashland entered into an Agreed Order
resolving the issues in contention, whereby Ashland agreed to pay a civil
penalty and to design, construct and install additional VOC controls.
Separately, the USEPA issued a Notice of Violation to Ashland regarding
this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 21, 1997 to announce that Ashland and
the Norwegian energy company, Statoil, signed a definitive purchase and
sale agreement for the outstanding stock of Blazer Energy Corp., a wholly
owned subsidiary of Ashland Inc.
A report on Form 8-K was filed on July 2, 1997, to announce the completion
of the sale of Blazer Energy Corp. to Statoil. Statoil purchased the Blazer
Energy stock through its U.S. energy management subsidiary, The Eastern
Group.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ashland Inc.
(Registrant)
Date /s/ Kenneth L. Aulen
-----------------------------------
Kenneth L. Aulen
Administrative Vice President
and Controller (Chief
Accounting Officer)
Date /s/ Thomas L. Feazell
-----------------------------------
Thomas L. Feazell
Senior Vice President,
General Counsel and Secretary
Article 5 of Regulation S-X
5
