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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 MARCH 31, 1999
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P. O. Box 391
Covington, Kentucky 41012-0391
Telephone Number: (606) 815-3333
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No
At April 30, 1999, there were 73,170,271 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 CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Six months ended
March 31 March 31
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(In millions except per share data) 1999 1998 1999 1998
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REVENUES
Sales and operating revenues $ 1,503 $ 1,473 $ 3,149 $ 3,071
Equity income 139 57 100 106
Other income 13 19 39 46
---------- ---------- ----------- -----------
1,655 1,549 3,288 3,223
COSTS AND EXPENSES
Cost of sales and operating expenses 1,176 1,201 2,476 2,509
Selling, general and administrative expenses 251 224 518 435
Depreciation, depletion and amortization 52 44 103 85
---------- ---------- ----------- -----------
1,479 1,469 3,097 3,029
---------- ---------- ----------- -----------
OPERATING INCOME 176 80 191 194
Interest expense (net of interest income) (34) (36) (67) (62)
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 142 44 124 132
Income taxes (55) (16) (48) (51)
---------- ---------- ----------- -----------
NET INCOME $ 87 $ 28 $ 76 $ 81
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EARNINGS PER SHARE - Note A
Basic $ 1.17 $ .37 $ 1.02 $ 1.07
Diluted $ 1.16 $ .37 $ 1.01 $ 1.05
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .55 $ .55
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31 September 30 March 31
(In millions) 1999 1998 1998
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 90 $ 34 $ 18
Accounts receivable 1,072 1,129 1,004
Allowance for doubtful accounts (22) (19) (20)
Inventories - Note A 480 440 465
Deferred income taxes 120 104 97
Other current assets 195 140 100
---------- ---------- ----------
1,935 1,828 1,664
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 2,095 2,102 2,074
Investment in Arch Coal 422 422 420
Cost in excess of net assets of companies acquired 224 207 184
Other noncurrent assets 340 362 406
---------- ---------- ----------
3,081 3,093 3,084
PROPERTY, PLANT AND EQUIPMENT
Cost 2,544 2,413 2,250
Accumulated depreciation, depletion and amortization (1,322) (1,252) (1,186)
---------- ---------- ----------
1,222 1,161 1,064
---------- ---------- ----------
$ 6,238 $ 6,082 $ 5,812
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Debt due within one year $ 441 $ 125 $ 265
Trade and other payables 1,115 1,199 971
Income taxes 32 37 45
---------- ---------- ----------
1,588 1,361 1,281
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,481 1,507 1,536
Employee benefit obligations 426 458 424
Reserves of captive insurance companies 181 165 176
Other long-term liabilities and deferred credits 481 454 328
Commitments and contingencies - Note E
---------- ---------- ----------
2,569 2,584 2,464
COMMON STOCKHOLDERS' EQUITY 2,081 2,137 2,067
---------- ---------- ----------
$ 6,238 $ 6,082 $ 5,812
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
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Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings income Total
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BALANCE AT OCTOBER 1, 1997 $ 75 $ 605 $ 1,379 $ (35) $ 2,024
Total comprehensive income (1) 81 (9) 72
Common stock cash dividends (42) (42)
Issued common stock under
Stock incentive plans 10 10
Acquisitions of other companies 1 1 3 5
Other changes (2) (2)
--------- --------- ---------- ---------------- --------
BALANCE AT MARCH 31, 1998 $ 76 $ 614 $ 1,421 $ (44) $ 2,067
========= ========= ========== ================ ========
BALANCE AT OCTOBER 1, 1998 $ 76 $ 602 $ 1,501 $ (42) $ 2,137
Total comprehensive income (1) 76 (12) 64
Common stock cash dividends (41) (41)
Issued common stock under
Stock incentive plans 5 5
Acquisitions of other companies 1 43 44
Repurchase of common stock (3) (126) (129)
Other changes 1 1
--------- --------- ---------- ---------------- --------
BALANCE AT MARCH 31, 1999 $ 74 $ 525 $ 1,536 $ (54) $ 2,081
========= ========= ========== ================ ========
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(1) Reconciliations of net income to total comprehensive income follow.
Three months ended Six months ended
March 31 March 31
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(In millions) 1999 1998 1999 1998
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Net income $ 87 $ 28 $ 76 $ 81
Unrealized translation adjustments (13) (4) (11) (9)
Related tax benefit 3 - 3 -
Unrealized gains (losses) on securities (2) - (3) 3
Related tax benefit (expense) 1 - 1 (1)
Gains on securities included in net income (1) - (3) (3)
Related tax expense - - 1 1
----------- ----------- ----------- -----------
Total comprehensive income $ 75 $ 24 $ 64 $ 72
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At March 31, 1999, accumulated other comprehensive income was a loss
of $54 million comprised of net unrealized translation losses of $36
million and a minimum pension liability of $18 million.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Six months ended
March 31
--------------------------------
(In millions) 1999 1998
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CASH FLOWS FROM CONTINUING OPERATIONS
Net income $ 76 $ 81
Expense (income) not affecting cash
Depreciation, depletion and amortization 103 85
Deferred income taxes 48 15
Equity income from affiliates (100) (106)
Distributions from equity affiliates 109 46
Other items - (7)
Change in operating assets and liabilities (1) (185) (180)
----------- -----------
51 (66)
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt - 150
Proceeds from issuance of capital stock 3 8
Repayment of long-term debt (26) (31)
Repurchase of capital stock (129) -
Increase in short-term debt 300 219
Dividends paid (41) (42)
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107 304
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (102) (109)
Purchase of leased assets associated with the formation of MAP - (254)
Purchase of operations - net of cash acquired (2) (27) (145)
Investment purchases (3) (73) (152)
Investment sales and maturities (3) 95 248
Other - net 5 38
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(102) (374)
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CASH PROVIDED (USED) BY CONTINUING OPERATIONS 56 (136)
Cash used by discontinued operations - (96)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 56 (232)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 34 250
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 90 $ 18
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(1) Excludes changes resulting from operations acquired or sold.
(2) Amounts exclude acquisitions through the issuance of common stock, which amounted to $44 million in 1999 and
$32 million in 1998.
(3) Represents primarily investment transactions of captive insurance companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND CONSOLIDATED 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. Although such
statements are subject to any year-end audit adjustments which may
be necessary, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. These financial statements
should be read in conjunction with Ashland's Annual Report on Form
10-K for the fiscal year ended September 30, 1998. Results of
operations for the six months ended March 31, 1999, are not
necessarily indicative of results to be expected for the year
ending September 30, 1999.
INVENTORIES
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March 31 September 30 March 31
(In millions) 1999 1998 1998
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Chemicals and plastics $ 370 $ 352 $ 375
Petroleum products 53 48 52
Construction materials 53 39 41
Other products 49 49 49
Supplies 8 9 10
Excess of replacement costs over LIFO carrying values (53) (57) (62)
-------- ------- -------
$ 480 $ 440 $ 465
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EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS).
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Three months ended Six months ended
March 31 March 31
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(In millions except per share data) 1999 1998 1999 1998
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NUMERATOR
Numerator for basic and diluted EPS - Net income $ 87 $ 28 $ 76 $ 81
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DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 74 76 74 75
Common shares issuable upon exercise of stock options 1 1 1 2
---------- ---------- ----------- ----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 75 77 75 77
========== ========== =========== ==========
BASIC EARNINGS PER SHARE $ 1.17 $ .37 $ 1.02 $ 1.07
DILUTED EARNINGS PER SHARE $ 1.16 $ .37 $ 1.01 $ 1.05
6
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE B - INFORMATION BY INDUSTRY SEGMENT
During the quarter ended March 31, 1999, Ashland took steps to
provide greater market focus and definition for its former Ashland
Chemical operations with the creation of two new divisions -
Ashland Distribution Company and Ashland Specialty Chemical
Company. These divisions replace Ashland Chemical Company. The
Information By Industry Segment on Page 10 has been presented
showing these two new segments, with prior periods restated for
comparison purposes. In addition, the following table shows total
assets and capital employed for each of the new segments at March
31, 1999, and restated as of September 30, 1998.
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Total assets Capital employed
-------------------------------- -----------------------------
March 31 September 30 March 31 September 30
(In millions) 1999 1998 1999 1998
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Ashland Distribution $ 938 $ 915 $ 534 $ 477
Ashland Specialty Chemical 873 861 573 557
NOTE C - UNUSUAL ITEMS
Marathon Ashland Petroleum LLC (MAP) maintains an inventory
valuation reserve to reduce the LIFO cost of its inventories to
their net realizable values. Adjustments in that reserve are
recognized quarterly based on changes in petroleum product prices,
creating non-cash charges or credits to Ashland's earnings. In
addition, during the six months ended March 31, 1998, Ashland
recorded a gain on the sale of its 23% interest in Melamine
Chemicals, Inc. The following tables show the effects of these
unusual items on Ashland's operating income, net income and
diluted earnings per share for the periods ended March 31, 1999,
and 1998.
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Three months ended Six months ended
March 31 March 31
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(In millions except per share data) 1999 1998 1999 1998
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Operating income before unusual items $ 44 $ 77 $ 152 $ 177
MAP inventory valuation adjustments 132 3 39 3
Ashland Specialty Chemical gain on sale
of Melamine Chemicals - - - 14
----------- ----------- ------------ ------------
Operating income as reported $ 176 $ 80 $ 191 $ 194
=========== =========== ============ ============
Net income before unusual items $ 6 $ 26 $ 52 $ 72
MAP inventory valuation adjustments 81 2 24 2
Ashland Specialty Chemical gain on sale
of Melamine Chemicals - - - 7
----------- ----------- ------------ ------------
Net income as reported $ 87 $ 28 $ 76 $ 81
=========== =========== ============ ============
Diluted earnings per share before unusual items $ .08 $ .34 $ .69 $ .94
Impact of unusual items 1.08 .03 .32 .11
----------- ----------- ------------ ------------
Diluted earnings per share as reported $ 1.16 $ .37 $ 1.01 $ 1.05
=========== =========== ============ ============
7
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE D - UNCONSOLIDATED AFFILIATES
Ashland is required by Rule 3-09 of Regulation S-X to file
separate financial statements for its two significant
unconsolidated affiliates, Marathon Ashland Petroleum LLC (MAP)
and Arch Coal, Inc. Such financial statements for the year ended
December 31, 1998, were filed on a Form 10-K/A on March 17, 1999.
Unaudited income statement information for these companies is
shown below.
Since MAP commenced operations on January 1, 1998, comparative
information for the six months ended March 31, 1998, is not
presented. MAP's results included adjustments to MAP's inventory
market valuation reserve. MAP is organized as a limited liability
company (LLC) that has elected to be taxed as a partnership.
Therefore, the parents are responsible for income taxes applicable
to their share of MAP's taxable income. The net income reflected
below for MAP does not include any provision for income taxes
which will be incurred by MAP's parents.
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Three months ended Six months ended
March 31 March 31
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(In millions) 1999 1998 1999 1998
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MAP
Sales and operating revenues $ 4,184 $ 4,589 $ 8,896
Income from operations 383 138 292
Net income
Including inventory valuation adjustments 381 141 293
Excluding inventory valuation adjustments 33 132 189
Ashland's equity income
Including inventory valuation adjustments 138 47 97
Excluding inventory valuation adjustments 6 44 58
ARCH COAL
Sales and operating revenues $ 406 $ 299 $ 800 $ 628
Income from operations 14 22 28 52
Net income 1 16 2 37
Ashland's equity income - 8 - 19
NOTE E - LITIGATION, CLAIMS AND CONTINGENCIES
Ashland is subject to various federal, state and local
environmental laws and regulations that require remediation
efforts at multiple locations, including current operating
facilities, operating facilities conveyed to MAP, previously owned
or operated facilities, and Superfund or other waste sites. For
information regarding environmental capital expenditures and
reserves, see the "Miscellaneous - Environmental Matters" section
of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties
that affect Ashland's ability to estimate its share of the
ultimate costs of required remediation efforts. Such uncertainties
involve the nature and extent of contamination at each site, the
extent of required cleanup efforts under existing environmental
regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number
and financial strength of other potentially responsible parties at
multiparty sites.
8
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE E - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
Ashland is a defendant in a series of cases involving more than
600 former workers at the Lockheed aircraft manufacturing facility
in Burbank, California. The plaintiffs allege personal injury
resulting from exposure to chemicals sold to Lockheed by Ashland,
and inadequate labeling of such chemicals. The cases are being
tried in the Superior Court of the State of California for the
County of Los Angeles. To date, five trials involving
approximately 130 plaintiffs have resulted in total verdicts
adverse to Ashland of approximately $80 million (approximately $75
million of which is punitive damages). The damage awards have been
appealed. Ashland believes that there is a substantial probability
that the damage awards will be reversed or reduced substantially.
In addition to these matters, Ashland and its subsidiaries are
parties to numerous other claims and lawsuits, some of which are
also for substantial amounts. While these actions are being
contested, the outcome of individual matters is not predictable
with assurance.
Ashland does not believe that any liability resulting from any of
the above matters, after taking into consideration its insurance
coverages and amounts already provided for, will have a material
adverse effect on its consolidated financial position, cash flows
or liquidity. However, such matters could have a material effect
on Ashland's results of operations in a particular quarter or
fiscal year as they develop or as new issues are identified.
NOTE F - ACQUISITIONS
During the six months ended March 31, 1999, APAC acquired six
construction businesses, four of which included the issuance of
$44 million in Ashland common stock. In addition, Ashland
Specialty Chemical made an acquisition in its Composite Polymers
division. These acquisitions were accounted for as purchases and
did not have a significant effect on Ashland's consolidated
financial statements.
9
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended Six months ended
March 31 March 31
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(In millions except as noted) 1999 1998 1999 1998
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REVENUES
Sales and operating revenues
Ashland Distribution $ 716 $ 740 $ 1,422 $ 1,466
Ashland Specialty Chemical 304 332 613 646
APAC 262 197 691 535
Valvoline 250 235 484 488
Intersegment sales
Ashland Distribution (8) (7) (17) (14)
Ashland Specialty Chemical (20) (22) (41) (44)
Valvoline (1) (2) (3) (6)
------------ ------------ ------------- -----------
1,503 1,473 3,149 3,071
Equity income
Ashland Specialty Chemical 1 2 3 4
Refining and Marketing 138 47 97 83
Arch Coal - 8 - 19
------------ ------------ ------------- -----------
139 57 100 106
Other income
Ashland Distribution 2 2 4 3
Ashland Specialty Chemical 5 5 9 25
APAC 2 3 5 4
Valvoline 1 2 3 5
Refining and Marketing 3 1 11 1
Corporate - 6 7 8
------------ ------------ ------------- -----------
13 19 39 46
------------ ------------ ------------- -----------
$ 1,655 $ 1,549 $ 3,288 $ 3,223
============ ============ ============= ===========
OPERATING INCOME
Ashland Distribution $ 13 $ 14 $ 25 $ 28
Ashland Specialty Chemical 21 23 49 61
APAC 2 - 28 19
Valvoline 13 5 24 16
Refining and Marketing (1) 6 41 58 78
Inventory valuation adjustments (2) 132 3 39 3
Arch Coal - 8 (1) 19
Corporate (11) (14) (31) (30)
------------ ------------ ------------- -----------
$ 176 $ 80 $ 191 $ 194
============ ============ ============= ===========
OPERATING INFORMATION
APAC
Construction backlog at March 31 (millions) $ 872 $ 825
Hot mix asphalt production (million tons) 3.1 2.3 9.9 7.7
Aggregate production (million tons) 4.1 3.7 9.3 8.3
Valvoline lubricant sales (thousand barrels per day) 16.4 15.5 16.1 15.5
Refining and Marketing (3)
Refined products sold (thousand barrels per day) 1,121 1,143 1,181
Crude oil refined (thousand barrels per day) 848 905 855
Arch Coal (3)
Tons sold (millions) 27.7 11.9 54.3 24.6
Tons produced (millions) 26.1 11.4 50.9 22.2
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(1) Effective January 1, 1998, includes Ashland's equity income from MAP,
amortization of Ashland's excess investment in MAP, and certain
retained refining and marketing activities.
(2) Represents Ashland's share of changes in MAP's inventory market
valuation reserve. The reserve reflects the excess of the LIFO cost of
MAP's crude oil and refined product inventories over their net
realizable values.
(3) Amounts represent 100% of the volumes of MAP or Arch Coal. MAP
commenced operations January 1, 1998.
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
CURRENT QUARTER - Ashland recorded net income of $87 million for
the quarter ended March 31, 1999, compared to $28 million for the
quarter ended March 31, 1998. Excluding unusual items described in
Note C to the Condensed Consolidated Financial Statements, net
income amounted to $6 million in the 1999 period, compared to $26
million in the 1998 period. The decline was due to severely
compressed refining margins in January and February of 1999.
Operating income from Ashland's wholly owned businesses was up
18%, as Valvoline and APAC reported excellent quarters, while
Ashland Distribution and Ashland Specialty Chemical provided solid
earnings. However, these good performances were more than offset
by lower profits from Refining and Marketing and Arch Coal.
YEAR-TO-DATE - For the six months ended March 31, 1999, Ashland
recorded net income of $76 million, compared to $81 million for
the six months ended March 31, 1998. Excluding unusual items
described in Note C to the Condensed Consolidated Financial
Statements, net income amounted to $52 million in the 1999 period,
compared to $72 million in the 1998 period. The decline was
generally due to the same factors described in the current quarter
comparison above.
ASHLAND DISTRIBUTION
CURRENT QUARTER - Ashland Distribution reported operating income
of $13 million for the quarter ended March 31, 1999, compared to
$14 million for the quarter ended March 31, 1998. The FRP Supply
division reported record second quarter operating income on the
strength of improved sales volumes, reflecting good conditions in
segments of the marine, construction and auto industries. The
Industrial Chemicals & Solvents division showed improvement,
reflecting higher gross profit margins. Results declined for the
remaining distribution divisions (General Polymers, Ashland
Plastics Europe, and Fine Ingredients) despite increases in unit
sales volumes, as they encountered some price deflation resulting
from weakness in commodity chemical markets.
YEAR-TO-DATE - For the six months ended March 31, 1999, Ashland
Distribution reported operating income of $25 million, compared to
$28 million for the same period of 1998. The decline was generally
due to the same factors described in the current quarter
comparison above.
ASHLAND SPECIALTY CHEMICAL
CURRENT QUARTER - For the quarter ended March 31, 1999, Ashland
Specialty Chemical reported operating income of $21 million,
compared to $23 million for the March 1998 quarter. Composite
Polymers, Specialty Polymers & Adhesives, and Drew Industrial all
set divisional second quarter profit records, primarily on the
strength of increased sales volumes. The Petrochemicals division
was up due to higher margins for maleic anhydride. These
improvements partially offset declines in the Foundry Products,
Drew Marine, and Electronic Chemicals divisions resulting
primarily from reduced sales volumes.
YEAR-TO-DATE - For the six months ended March 31, 1999, Ashland
Specialty Chemical reported operating income of $49 million.
Results for the first six months of 1998 amounted to $47 million,
excluding a $14 million pretax gain on the sale of Ashland's 23%
interest in Melamine Chemicals. Improvements in Composite
Polymers, Specialty Polymers & Adhesives, Drew Industrial and
Petrochemicals more than offset declines in Foundry Products, Drew
Marine and Electronic Chemicals. The same factors discussed in the
current quarter comparison above affected the year-to-date
comparison.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
APAC
CURRENT QUARTER - For the second quarter of fiscal 1999, APAC's
construction operations reported operating income of $2 million,
compared to breakeven results for the March 1998 quarter. Given
the seasonality of highway construction, the March quarter is
typically the slowest period in the construction season. The
profit generated in the March 1999 quarter reflects improvements
in cost control and better weather conditions than the March 1998
quarter.
YEAR-TO-DATE - For the six months ended March 31, 1999, APAC
reported operating income of $28 million, a 51% improvement over
$19 million for the same period of 1998. Net revenue (total
revenue less subcontract work) increased 30%, while production of
hot mix asphalt was up 29% and crushed aggregate was up 12% from
the 1998 period. The construction backlog at March 31, 1999,
amounted to $872 million, the best March level in APAC history,
representing a 6% improvement over the March 1998 level. In
keeping with Ashland's strategy to grow higher return businesses,
APAC completed six acquisitions during the first half of fiscal
1999, expanding its market position in North Carolina, Virginia
and Missouri.
VALVOLINE
CURRENT QUARTER - For the quarter ended March 31, 1999, Valvoline
reported operating income of $13 million, compared to $5 million
for the March 1998 quarter. Earnings from the core lubricant
business remained strong, reflecting increased lubricant sales
volumes. In addition, automotive chemical sales continue to gain
momentum as the new SynPower product line has received widespread
customer acceptance following an aggressive marketing program
launched in fiscal 1998. Revenues for Eagle One car care product
lines are rapidly increasing with good market penetration among
the major mass market and automotive retailers. Valvoline Instant
Oil Change had a record March quarter achieving higher daily car
counts. Partially offsetting these improvements were lower
earnings from Valvoline International operations in Europe and
Latin America. In addition, the used-oil collection business felt
the adverse effects of soft used-oil fuel prices.
YEAR-TO-DATE - For the six months ended March 31, 1999, Valvoline
reported operating income of $24 million, compared to $16 million
for the same period of 1998. The increase was generally due to the
same factors described in the current quarter comparison above.
REFINING AND MARKETING
CURRENT QUARTER - Operating income from Refining and Marketing
(excluding $132 million in favorable inventory market valuation
adjustments) amounted to $6 million for the quarter ended March
31, 1999. This compares to $41 million for the quarter ended March
31, 1998 (excluding $3 million in favorable inventory market
valuation adjustments). Results for both periods include Ashland's
38% share of MAP's earnings, amortization of Ashland's excess
investment in MAP, and results of certain retained refining and
marketing activities. The decline in operating income was
primarily due to severely compressed refining margins in January
and February. In addition to margin compression early in the
quarter, results were adversely affected by an estimated loss on
the pending sale of MAP's Scurlock Permian operations, of which
Ashland's share was $6 million. Results from retail marketing
operations increased primarily on the strength of higher
merchandise sales volumes. Transportation operations declined as a
result of increased operating expenses and decreased throughput
volumes.
12
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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REFINING AND MARKETING (CONTINUED)
YEAR-TO-DATE - Operating income from Refining and Marketing
(excluding $39 million in favorable inventory market valuation
adjustments) amounted to $58 million for the six months ended
March 31, 1999. This compares to $78 million for the six months
ended March 31, 1998 (excluding $3 million in favorable inventory
market valuation adjustments). Results for the prior year's period
include the operating income of the former Ashland Petroleum and
SuperAmerica divisions for the December 1997 quarter. MAP was
formed January 1, 1998, when Ashland combined its refining and
marketing operations with those of the USX-Marathon Group. The
decrease in operating income reflects reduced refining margins and
other factors described in the current quarter comparison above.
The impact of decreased refining margins has been somewhat
mitigated by substantial efficiency improvements resulting from
the combined operations of MAP. In its first year of existence,
MAP captured approximately $150 million in annual, repeatable,
pretax savings and established itself as an industry leader in
earnings per barrel of crude oil throughput. An additional $100
million in efficiencies are targeted for calendar 1999. Looking
toward the remainder of fiscal 1999, refining margins typically
improve entering the driving season, and MAP continues to achieve
its savings targets. In addition, asphalt markets are expected to
be tight, which should benefit MAP as the nation's largest asphalt
producer.
ARCH COAL
CURRENT QUARTER - Ashland recorded breakeven results from its
investment in Arch Coal for the quarter ended March 31, 1999,
compared to operating income of $8 million for the quarter ended
March 31, 1998. The decline was due to continuing challenges at
certain mines and mild winter weather that contributed to a weak
coal market. An operating loss from Arch's Dal-Tex operation in
southern West Virginia was due to an extended delay in obtaining a
surface mining permit for additional reserves at the site. As a
result of this delay, Arch has announced plans to close the mine
in July and recorded an after-tax charge of $4.0 million in the
March 1999 quarter for severance and other labor, benefit and
miscellaneous costs related to the impending closure. Largely
offsetting this charge, Arch recorded an after-tax gain of $3.8
million in the March 1999 quarter for the cumulative effect of an
accounting change in the method it uses for depreciating certain
assets. Arch switched from the straight-line method to the
units-of-production method for depreciating its preparation plants
and rail-loading facilities, which will yield a more accurate
matching of costs to actual production. Arch is continuing its
efforts to improve performance at its Black Thunder mine in
eastern Wyoming, but has yet to reach its targets for expanded
production and reduced costs. Arch expects Black Thunder to be in
a considerably stronger position by the end of calendar 1999.
YEAR-TO-DATE - For the six months ended March 31, 1999, Ashland
recorded an operating loss of $1 million from its investment in
Arch, compared to operating income of $19 million for the same
period of 1998. In addition to the factors described in the
current quarter comparison above, results for the December 1998
quarter were impacted by inadequate rail service and
higher-than-expected operating costs at Arch's West Elk mine in
Colorado, as well as bitterly cold weather that hindered both
equipment and rail performance of Western operations. As it
previously announced, Arch expects continued earnings weakness
during calendar 1999, primarily as a result of the Dal-Tex
situation, lower-than-expected price escalations in sales
contracts, and the re-opening and renegotiation of several large
contracts.
13
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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CORPORATE
Corporate expenses amounted to $11 million in the quarter ended
March 31, 1999, compared to $14 million for the quarter ended
March 31, 1998. The decline reflects reductions in incentive and
deferred compensation costs. Corporate expenses on a year-to-date
basis were relatively unchanged, amounting to $31 million for the
1999 period, compared to $30 million for the 1998 period.
INTEREST EXPENSE (NET OF INTEREST INCOME)
For the three months ended March 31, 1999, interest expense (net
of interest income) totaled $34 million, compared to $36 million
for the March 1998 quarter. The decline reflects higher
miscellaneous interest charges in the March 1998 quarter. For the
year-to-date, interest expense (net of interest income) amounted
to $67 million in the 1999 period, compared to $62 million in the
1998 period. The increase reflects increased debt levels resulting
primarily from $254 million in purchases of leased assets in
December 1997 and January 1998 associated with the formation of
MAP, from common stock repurchases and from acquisitions.
FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to obtain capital for
its financing needs and to maintain investment grade ratings on
its senior debt of Baa2 from Moody's and BBB from Standard &
Poor's. Ashland has a revolving credit agreement which expires on
February 9, 2000, providing for up to $320 million in borrowings,
none of which was in use at March 31, 1999. At that date, under a
shelf registration, Ashland could also issue an additional $600
million in debt, equity or convertible securities should future
opportunities or needs arise. On May 7, 1999, Ashland issued $150
million in medium-term notes under the registration and used the
proceeds to reduce short-term debt. Furthermore, Ashland has
access to various uncommitted lines of credit and commercial paper
markets, under which $383 million of short-term borrowings were
outstanding at March 31, 1999.
Cash flows from continuing operations, a major source of Ashland's
liquidity, amounted to $51 million for the six months ended March
31, 1999, compared to a deficit of $66 million for the six months
ended March 31, 1998. The increase reflects a higher level of cash
distributions from MAP in the December 1998 quarter, compared to
cash generated from Ashland's former Refining and Marketing
operations in the December 1997 quarter. Ashland's capital
requirements for net property additions and dividends exceeded
cash flows from continuing operations by $87 million for the six
months ended March 31, 1999.
Operating working capital (accounts receivable and inventories,
less trade and other payables) at March 31, 1999, was $415
million, compared to $351 million at September 30, 1998, and $478
million at March 31, 1998. Liquid assets (cash, cash equivalents
and accounts receivable) amounted to 72% of current liabilities at
March 31, 1999, compared to 84% at September 30, 1998, and 78% at
March 31, 1998. Ashland's working capital is affected by its use
of the LIFO method of inventory valuation, which valued
inventories $53 million below their replacement costs at March 31,
1999.
14
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
CAPITAL RESOURCES
For the six months ended March 31, 1999, property additions
amounted to $102 million, compared to $109 million for the same
period last year. Property additions and cash dividends for the
remainder of fiscal 1999 are estimated at $100 million and $40
million. Under Ashland's share repurchase program initiated in
August 1998, Ashland had repurchased 3.7 million shares through
March 31, 1999, with remaining authority to repurchase an
additional 2.7 million shares. The timing and exact number of
shares to be repurchased will be dependent on market conditions.
Ashland anticipates meeting its remaining 1999 capital
requirements for property additions, debt repayments and dividends
from internally generated funds. However, external financing may
be necessary to fund common stock repurchases and acquisitions.
At March 31, 1999, Ashland's debt level amounted to $1.9 billion,
compared to $1.6 billion at September 30, 1998. Debt as a percent
of capital employed amounted to 48% at March 31, 1999, compared to
43% at September 30, 1998. During the quarter ended December 31,
1998, Ashland liquidated $200 million of its interest rate swap
agreements, which had converted fixed-rate debt to floating rates
at September 30, 1998. As a result, Ashland's exposure to
short-term interest rate fluctuations for the remainder of 1999
will be limited to $38 million in floating-rate debt outstanding
at March 31, 1999, the remaining $25 million floating-rate swap
agreement, and any short-term notes and commercial paper
outstanding.
ENVIRONMENTAL MATTERS
Federal, state and local laws and regulations relating to the
protection of the environment have resulted in higher operating
costs and capital investments by the industries in which Ashland
operates. Because of the continuing trends toward greater
environmental awareness and ever increasing regulations, Ashland
believes that expenditures for environmental compliance will
continue to have a significant effect on its businesses. Although
it cannot accurately predict how such trends will affect future
operations and earnings, Ashland believes the nature and
significance of its ongoing compliance costs will be comparable to
those of its competitors. For information on certain specific
environmental proceedings and investigations, see the "Legal
Proceedings" section of this Form 10-Q. For information regarding
environmental capital expenditures and reserves, see the
"Miscellaneous - Environmental Matters" section of Ashland's Form
10-K.
Environmental reserves are subject to considerable uncertainties
that affect Ashland's ability to estimate its share of the
ultimate costs of required remediation efforts. Such uncertainties
involve the nature and extent of contamination at each site, the
extent of required cleanup efforts under existing environmental
regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number
and financial strength of other potentially responsible parties at
multiparty sites.
Ashland does not believe that any liability resulting from
environmental matters, after taking into consideration its
insurance coverage and amounts already provided for, will have a
material adverse effect on its consolidated financial position,
cash flows or liquidity. However, such matters could have a
material effect on Ashland's results of operations in a particular
quarter or fiscal year as they develop or as new issues are
identified.
15
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
YEAR 2000 READINESS
Ashland, like most other companies, is faced with the Year 2000
issue and began developing plans in 1994 to address the possible
exposures. Project teams are responsible for coordinating the
assessment, remediation and testing of the necessary modifications
to Ashland's computer applications, including both internal
information systems and embedded systems, as well as assessing the
Year 2000 readiness of its major vendors and developing
contingency plans. The team's progress is regularly monitored by
Ashland's senior management and periodically reported to the Audit
Committee of Ashland's Board of Directors.
Ashland has completed the assessment phase related to its internal
information systems, and is resolving identified issues through
system modifications or replacement. Although testing will
continue, Ashland believes that about 93% of its significant
systems are currently Year 2000 compliant, and that the remaining
systems will be compliant by early summer.
Ashland has substantially completed the assessment of its embedded
systems that operate such items as its manufacturing systems,
laboratory processes and security systems. Embedded systems will
be remediated or replaced as necessary by early summer or plans
will be made to perform such remediation or replacement activities
as part of scheduled shutdowns that will occur later in 1999. The
quality of the responses received from the manufacturers of such
equipment, the estimated effect of the individual system on
Ashland, and the ability of Ashland to perform meaningful tests
will determine whether independent testing of remediated embedded
systems will be conducted.
Formal communications have been initiated with major vendors to
assess the potential exposure to Ashland from their failure to
remediate their own Year 2000 issues. A failure by any of these
vendors could become a significant challenge to Ashland's ability
to operate its facilities at affected locations. Vendors contacted
include Ashland's suppliers, financial institutions and companies
providing utilities (electric, telephone and water). Alternate
providers of products and services will be established, if deemed
necessary. Although Ashland has no means of ensuring the Year 2000
readiness of such vendors, it will continue to gather information
and monitor their compliance. Based on the representations
provided by these vendors to date, Ashland has no reason to
believe that these vendors are not addressing their Year 2000
issues adequately.
Ashland is also developing contingency plans related to the Year
2000 issue, addressing various scenarios and alternatives. Among
other things, such plans will likely include replacing electronic
applications with manual processes, identifying alternate vendors,
adjusting staffing requirements, and increasing raw material
inventory levels, as deemed necessary. Contingency plans are
expected to be completed by June 1999, and will be regularly
updated as current issues develop or new issues are identified.
Although a full assessment has not yet been completed, Ashland
estimates that its fiscal 1999 costs related to Year 2000 issues
will not exceed $15 million, and will be minimal thereafter. Such
amount is based on various assumptions, including the expected
availability and costs of internal and external resources and the
complexity of the necessary changes. Such estimate does not
include any costs of new systems for which the principal
justification is improved business functionality, rather than Year
2000 compliance. Since Ashland's Year 2000 compliance program was
initiated several years ago and has been integrated with other
system enhancements, Ashland's total costs of remediating Year
2000 issues are not readily discernible.
16
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
YEAR 2000 READINESS (continued)
Ashland believes it has an effective program to resolve
significant Year 2000 issues in a timely manner. However, certain
phases of that program have not yet been completed and some
exposures are outside Ashland's direct control. If Ashland is
unsuccessful in identifying or remediating Year 2000 issues in its
significant systems, is affected by major vendors or customers not
being Year 2000 compliant, or is affected by general economic
disruptions resulting from Year 2000 issues, its consolidated
financial position or results of operations could be materially
adversely affected.
MAP and Arch Coal also have prepared their own programs to deal
with Year 2000 issues. Arch Coal's program is outlined in the
Management's Discussion and Analysis section of its Annual Report
on Form 10-K for the year ended December 31, 1998. MAP's program
is covered in the Management's Discussion and Analysis section for
the Marathon Group in USX Corporation's Annual Report on Form 10-K
for the year ended December 31, 1998. Both of these documents are
on file with the Securities and Exchange Commission.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, with respect to
Ashland's operating performance. Estimates as to operating
performance are based upon a number of assumptions, including
(among others) prices, supply and demand, market conditions and
operating efficiencies. Although Ashland believes that its
expectations are based on reasonable assumptions, it cannot assure
that the expectations reflected herein will be achieved. This
forward-looking information may prove to be inaccurate, and actual
results may differ significantly from those anticipated. Other
factors and risks affecting Ashland are contained in Ashland's
Form 10-K for the fiscal year ended September 30, 1998.
17
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - As of March 31, 1999, Ashland had been
identified as a "potentially responsible party" ("PRP") under Superfund or
similar state laws for potential joint and several liability for clean-up
costs in connection with alleged releases of hazardous substances in
connection with 92 waste treatment or disposal sites. These sites are
currently subject to ongoing investigation and remedial activities,
overseen by the United States Environmental Protection Agency ("EPA") or a
state agency, in which Ashland is typically participating as a member of a
PRP group. Generally, the type of relief sought includes remediation of
contaminated soil and/or groundwater, reimbursement for past costs of site
clean-up and administrative oversight, and/or long-term monitoring of
environmental conditions at the sites. Ashland carefully monitors the
investigatory and remedial activity at many of these sites. Based on its
experience with site remediation, its familiarity with current
environmental laws and regulations, its analysis of the specific hazardous
substances at issue, the existence of other financially viable PRPs and its
current estimates of investigatory, clean-up and monitoring costs at each
site, Ashland believes that its liability at these sites, either
individually or in the aggregate, after taking into account its insurance
coverage and established reserves, will not have a material adverse effect
on Ashland's consolidated financial position, cash flow or liquidity.
However, such matters could have a material effect on Ashland's results of
operations in a particular quarter or fiscal year as they develop or as new
issues are identified. Estimated costs for these matters are recognized in
accordance with generally accepted accounting principles governing the
likelihood that costs will be incurred and Ashland's ability to reasonably
estimate future costs.
LOCKHEED LITIGATION - Ashland is a defendant in a series of cases involving
more than 600 former workers at the Lockheed aircraft manufacturing
facility in Burbank, California. The plaintiffs allege personal injuries
resulting from exposure to chemicals sold to Lockheed by Ashland, and
inadequate labeling of such chemicals. The cases are being tried in the
Superior Court of the State of California for the County of Los Angeles. To
date, five trials involving approximately 130 plaintiffs have resulted in
total verdicts adverse to Ashland of approximately $80 million
(approximately $75 million of which is punitive damages). The damage awards
have been appealed. Ashland believes that there is a substantial
probability that the damage awards will be reversed or substantially
further reduced, and that, after taking into account probable recoveries
under insurance policies, these cases will not have a material adverse
effect on Ashland's consolidated financial position, cash flow or
liquidity.
In addition, Ashland filed an action in Kentucky against approximately 44
insurance carriers to confirm coverage for liabilities under the Lockheed
cases. One of the insurance carriers in turn filed an action in California
seeking to deny insurance coverage for liabilities in these cases.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 1999, Ashland issued an aggregate of
801,473 shares of its Common Stock, par value $1.00 per share, in
connection with the acquisitions of three companies. All such shares were
issued in transactions exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended, and the regulations thereunder.
Such acquisitions were: McDonald Grading Co., Inc. which closed on February
12, 1999, Crowell Constructors, Inc. which closed on February 12, 1999, and
Highway Constructors, Inc. which closed on March 25, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
18
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: May 13, 1999 /s/ Kenneth L. Aulen
--------------------------------------
Kenneth L. Aulen
Administrative Vice President and Controller
(Chief Accounting Officer)
Date: May 13, 1999 /s/ David L. Hausrath
---------------------------------------
David L. Hausrath
Vice President and General Counsel
19
EXHIBIT INDEX
Exhibit No. Description
- ----------- ---------------------------------------------------
27 Financial Data Schedule
5
