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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
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: (859) 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 January 31, 2002, there were 69,317,563 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
December 31
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(In millions except per share data) 2001 2000
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REVENUES
Sales and operating revenues $ 1,812 $ 1,878
Equity income 52 121
Other income 19 14
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1,883 2,013
COSTS AND EXPENSES
Cost of sales and operating expenses 1,464 1,546
Selling, general and administrative expenses 268 265
Depreciation, depletion and amortization 53 58
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1,785 1,869
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OPERATING INCOME 98 144
Net interest and other financial costs (36) (46)
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INCOME BEFORE INCOME TAXES 62 98
Income taxes (24) (39)
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NET INCOME $ 38 $ 59
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EARNINGS PER SHARE - Note A
Basic $ .55 $ .84
Diluted $ .54 $ .84
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275
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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December 31 September 30 December 31
(In millions) 2001 2001 2000
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ASSETS
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CURRENT ASSETS
Cash and cash equivalents $ 264 $ 236 $ 108
Accounts receivable 1,042 1,219 1,153
Allowance for doubtful accounts (33) (34) (30)
Inventories - Note A 495 495 528
Deferred income taxes 114 126 126
Other current assets 85 171 108
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1,967 2,213 1,993
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 2,319 2,387 2,209
Goodwill 529 528 528
Other noncurrent assets 378 377 412
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3,226 3,292 3,149
PROPERTY, PLANT AND EQUIPMENT
Cost 3,046 3,030 2,898
Accumulated depreciation, depletion and amortization (1,616) (1,590) (1,496)
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1,430 1,440 1,402
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$ 6,623 $ 6,945 $ 6,544
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Debt due within one year $ 105 $ 85 $ 268
Trade and other payables 1,065 1,392 1,114
Income taxes 249 20 181
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1,419 1,497 1,563
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,740 1,786 1,874
Employee benefit obligations 430 412 386
Deferred income taxes 204 440 174
Reserves of captive insurance companies 176 173 202
Other long-term liabilities and deferred credits 404 411 352
Commitments and contingencies - Note E
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2,954 3,222 2,988
COMMON STOCKHOLDERS' EQUITY 2,250 2,226 1,993
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$ 6,623 $ 6,945 $ 6,544
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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 loss Total
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BALANCE AT OCTOBER 1, 2000 $ 70 $ 388 $ 1,579 $ (72) $ 1,965
Total comprehensive income (1) 59 (8) 51
Cash dividends (19) (19)
Issued common stock under
stock incentive plans 5 5
Repurchase of common stock (9) (9)
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BALANCE AT DECEMBER 31, 2000 $ 70 $ 384 $ 1,619 $ (80) $ 1,993
========= ========= ========= ============ ========
BALANCE AT OCTOBER 1, 2001 $ 69 $ 363 $ 1,920 $ (126) $ 2,226
Total comprehensive income (1) 38 (2) 36
Cash dividends (19) (19)
Issued common stock under
stock incentive plans 7 7
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BALANCE AT DECEMBER 31, 2001 $ 69 $ 370 $ 1,939 $ (128) $ 2,250
========== ========= ========= ============ ========
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(1) Reconciliations of net income to total comprehensive income follow.
Three months ended
December 31
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(In millions) 2001 2000
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Net income $ 38 $ 59
Unrealized translation adjustments (4) (10)
Related tax benefit 2 2
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Total comprehensive income $ 36 $ 51
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At December 31, 2001, the accumulated other comprehensive loss of
$128 million (after tax) was comprised of net unrealized translation
losses of $85 million and a minimum pension liability of $43
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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Three months ended
December 31
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(In millions) 2001 2000
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CASH FLOWS FROM OPERATIONS
Net income $ 38 $ 59
Expense (income) not affecting cash
Depreciation, depletion and amortization 53 58
Deferred income taxes (36) 13
Equity income from affiliates (52) (121)
Distributions from equity affiliates 119 209
Change in operating assets and liabilities (1) (32) (31)
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90 187
CASH FLOWS FROM FINANCING
Proceeds from issuance of common stock 4 2
Repayment of long-term debt (25) (38)
Repurchase of common stock - (9)
Decrease in short-term debt - (46)
Dividends paid (19) (19)
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(40) (110)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (44) (40)
Purchase of operations - net of cash acquired (5) (8)
Proceeds from sale of operations - 9
Other - net 5 3
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(44) (36)
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CASH PROVIDED BY CONTINUING OPERATIONS 6 41
Cash provided by discontinued operations -Note B 22 -
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INCREASE IN CASH AND CASH EQUIVALENTS 28 41
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 236 67
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 264 $ 108
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(1) Excludes changes resulting from operations acquired or sold.
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, 2001. Results of operations for the
period ended December 31, 2001, are not necessarily indicative of results
to be expected for the year ending September 30, 2002.
INVENTORIES
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December 31 September 30 December 31
(In millions) 2001 2001 2000
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Chemicals and plastics $ 368 $ 374 $ 411
Construction materials 70 74 76
Petroleum products 59 54 65
Other products 59 57 42
Supplies 6 6 7
Excess of replacement costs over LIFO carrying values (67) (70) (73)
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$ 495 $ 495 $ 528
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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
December 31
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(In millions except per share data) 2001 2000
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NUMERATOR
Numerator for basic and diluted EPS - Net income $ 38 $ 59
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DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 69 70
Common shares issuable upon exercise of stock options 1 -
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Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 70 70
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BASIC EPS $ .55 $ .84
DILUTED EPS $ .54 $ .84
ACCOUNTING CHANGE
In June 2001, the Financial Accounting Standards Board issued Statement No.
142 (FAS 142), "Goodwill and Other Intangible Assets." Under FAS 142,
goodwill and intangible assets with indefinite lives will no longer be
amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives. As permitted,
Ashland adopted the statement as of October 1, 2001, the beginning of its
fiscal year.
6
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGE (CONTINUED)
Ashland has no recorded intangible assets that are not subject to
amortization. Recorded intangible assets subject to amortization (included
in other noncurrent assets) and the related amortization expense are not
material to Ashland's consolidated financial position or results of
operations, respectively.
By March 31, 2002, Ashland must perform its initial impairment test of
goodwill as of October 1, 2001. Although the test has not yet been
completed, Ashland does not expect it to result in any significant
impairment charges.
The nonamortization of goodwill has increased Ashland's net income and
earnings per share. Following are pro forma results assuming goodwill had
not been amortized prior to October 1, 2001.
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Three months ended
December 31
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(In millions except per share data) 2001 2000
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Reported net income $ 38 $ 59
Add back: Goodwill amortization - 9
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Adjusted net income $ 38 $ 68
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Basic EPS - as reported $ .55 $ .84
Add back: Goodwill amortization - .13
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Basic EPS - adjusted $ .55 $ .97
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Diluted EPS - as reported $ .54 $ .84
Add back: Goodwill amortization - .13
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Diluted EPS - adjusted $ .54 $ .97
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Following is a progression of goodwill by segment for the quarter
ended December 31, 2001.
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Ashland
Ashland Specialty
(In millions) APAC Distribution Chemical Valvoline Total
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Balance at October 1, 2001 $ 419 $ 14 $ 92 $ 3 $ 528
Acquisitions - - 1 - 1
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Balance at December 31, 2001 $ 419 $ 14 $ 93 $ 3 $ 529
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NOTE B - DISCONTINUED OPERATIONS
In March 2000, Ashland distributed 17.4 million shares of its Arch Coal
Common Stock to Ashland's shareholders. Ashland sold its remaining 4.7
million Arch Coal shares in February 2001 for $86 million (after
underwriting commissions). Such sale resulted in a pretax gain on disposal
of discontinued operations of $49 million ($33 million after provisions for
current and deferred income taxes). In the December 2001 quarter, Ashland
received $22 million in current tax benefits from capital loss carrybacks
generated by the sale, which are included in "Cash provided by discontinued
operations" on the Statements of Consolidated Cash Flows.
7
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - UNUSUAL ITEM
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. The following tables show the effect of this unusual
item on Ashland's operating income, net income and diluted earnings per
share.
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Three months ended
December 31
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(In millions except per share data) 2001 2000
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Operating income before unusual item $ 127 $ 144
MAP inventory valuation adjustments (29) -
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Operating income as reported $ 98 $ 144
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Net income before unusual item $ 56 $ 59
MAP inventory valuation adjustments (18) -
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Net income as reported $ 38 $ 59
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Diluted earnings per share before unusual item $ .80 $ .84
Impact of unusual item (.26) -
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Diluted earnings per share as reported $ .54 $ .84
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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 significant unconsolidated affiliate, Marathon
Ashland Petroleum LLC (MAP). Ashland's ownership position in Arch Coal,
Inc. met those same filing requirements prior to the spin-off and sale
described in Note B. Financial statements for MAP and Arch Coal for the
year ended December 31, 2000, were filed on a Form 10-K/A on March 30,
2001. Financial statements for MAP for the year ended December 31, 2001,
will be filed by means of a Form 10-K/A on or before March 31, 2002.
Unaudited income statement information for MAP is shown below.
MAP is organized as a limited liability company 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
that will be incurred by its parents.
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Three months ended
December 31
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(In millions) 2001 2000
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Sales and operating revenues $ 5,743 $ 7,363
Income from operations 147 327
Net income
Including inventory valuation adjustments 144 329
Excluding inventory valuation adjustments 221 329
Ashland's equity income
Including inventory valuation adjustments 50 119
Excluding inventory valuation adjustments 79 119
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
Ashland is subject to various federal, state and local environmental laws
and regulations that require environmental assessment or remediation
efforts (collectively environmental remediation) at multiple locations. At
December 31, 2001, such locations included 95 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, approximately 130 current and former
operating facilities (including certain operating facilities conveyed to
MAP) and about 1,200 service station properties. Ashland's reserves for
environmental remediation amounted to $173 million at December 31, 2001.
Such amount reflects Ashland's estimate of the most likely costs that will
be incurred over an extended period to remediate identified conditions for
which the costs are reasonably estimable, without regard to any third-party
recoveries.
Environmental remediation reserves are subject to numerous inherent
uncertainties that affect Ashland's ability to estimate its share of the
ultimate costs of the 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. Reserves are regularly adjusted as
environmental remediation continues.
None of the remediation locations is individually material to Ashland as
its largest reserve for any site is under $10 million. As a result,
Ashland's exposure to adverse developments with respect to any individual
site is not expected to be material, and these sites are in various stages
of the ongoing environmental remediation process. Although environmental
remediation could have a material effect on results of operations if a
series of adverse developments occurs in a particular quarter or fiscal
year, Ashland believes that the chance of such developments occurring in
the same quarter or fiscal year is remote.
In addition to the environmental matters described above, there are pending
or threatened against Ashland and its current and former subsidiaries
various claims, lawsuits and administrative proceedings. Such actions are
with respect to commercial matters, product liability, toxic tort
liability, numerous asbestos claims, and other environmental matters, which
seek remedies or damages some of which are for substantial amounts. While
these actions are being contested, their outcome is not predictable with
assurance and could be material to results of operations in the period they
are recognized. However, Ashland does not believe that any liability
resulting from these actions and environmental remediation after taking
into consideration expected recoveries from insurers, contributions by
other responsible parties and amounts already provided for, will have a
material adverse effect on its consolidated financial position, cash flows
or liquidity.
9
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended
December 31
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(In millions) 2001 2000
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REVENUES
Sales and operating revenues
APAC $ 681 $ 621
Ashland Distribution 584 731
Ashland Specialty Chemical 312 311
Valvoline 255 241
Intersegment sales
Ashland Distribution (5) (8)
Ashland Specialty Chemical (15) (18)
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1,812 1,878
Equity income
Ashland Specialty Chemical 1 1
Valvoline 1 1
Refining and Marketing 50 119
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52 121
Other income
APAC 1 2
Ashland Distribution 9 2
Ashland Specialty Chemical 5 7
Valvoline 1 1
Refining and Marketing 2 -
Corporate 1 2
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19 14
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$ 1,883 $ 2,013
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OPERATING INCOME
APAC $ 36 $ 13
Ashland Distribution 9 10
Ashland Specialty Chemical 16 18
Valvoline 11 10
Refining and Marketing (1) 45 109
Corporate (19) (16)
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$ 98 $ 144
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(1) Includes Ashland's equity income from MAP, amortization of Ashland's
excess investment in MAP, and other activities associated with
refining and marketing.
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended
December 31
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2001 2000
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OPERATING INFORMATION
APAC
Construction backlog at December 31 (millions) $ 1,546 $ 1,600
Hot-mix asphalt production (million tons) 9.3 8.5
Aggregate production (million tons) 7.9 5.9
Ready-mix concrete production (thousand cubic yards) 529 523
Ashland Distribution (1)
Sales per shipping day (millions) $ 9.4 $ 12.0
Gross profit as a percent of sales 16.5% 15.6%
Ashland Specialty Chemical (1
Sales per shipping day (millions) $ 5.0 $ 5.1
Gross profit as a percent of sales 34.5% 34.0%
Valvoline lubricant sales (thousand barrels per day) 11.2 10.5
Refining and Marketing (2)
Crude oil refined (thousand barrels per day) 925 857
Refined products sold (thousand barrels per day) (3) 1,317 1,308
Refining and wholesale marketing margin (per barrel) (4) $ 2.70 $ 3.75
Speedway SuperAmerica (SSA) (5)
Retail outlets at December 31 2,104 2,148
Gasoline and distillate sales (millions of gallons) 916 930
Gross margin - gasoline and distillates (per gallon) $ .1139 $ .1183
Merchandise sales (millions) $ 584 $ 517
Merchandise margin (as a percent of sales) 24.0% 23.8%
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(1) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses, less depreciation and amortization relative to
manufacturing assets.
(2) Amounts represent 100 percent of MAP's operations, in which Ashland
owns a 38 percent interest.
(3) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(4) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(5) Excludes travel centers contributed to Pilot Travel Centers LLC.
Periods prior to September 1, 2001, have been restated.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
Ashland's net income was $38 million for the quarter ended December 31,
2001, including an $18 million after-tax, non-cash charge for the inventory
valuation adjustment for Marathon Ashland Petroleum (MAP) described in Note
C to the Condensed Consolidated Financial Statements. Excluding the unusual
charge, net income amounted to $56 million in the 2001 period, compared to
$59 million in the 2000 period. Operating income excluding the unusual item
amounted to $127 million in the December 2001 quarter compared to a record
$144 million for the December 2000 quarter. Earnings from Ashland's wholly
owned businesses increased 41 percent, as improved results from APAC's
highway construction operations and Valvoline more than offset declines
from the recession-affected chemical businesses of Ashland Distribution and
Ashland Specialty Chemical. However, this improvement was more than offset
by a decline in Refining and Marketing as refining margins fell
significantly in the latter part of December.
As described in Note A to the Condensed Consolidated Financial Statements,
Ashland adopted FAS 142 effective October 1, 2001, which caused
amortization of goodwill to cease. Goodwill amortization reduced operating
income by $11 million and net income by $9 million in the quarter ended
December 31, 2000. The reductions in operating income by segment were $6
million for APAC, $1 million each for Ashland Distribution and Ashland
Specialty Chemical and $3 million for Refining and Marketing.
APAC
Operating income from APAC's construction operations nearly tripled to $36
million for the December 2001 quarter, compared to $13 million in the
December 2000 quarter. Improved weather patterns, falling hydrocarbon costs
and better construction margins were the key contributors to APAC's
performance. Exceptionally warm and dry conditions existed in many
locations this year, compared to last year's cold, wet weather. Net
construction job revenue (total revenue less subcontract costs) increased
1% from the prior year period, while job margins increased to 7.6%,
compared to 7.0% last year. Asphalt plant profitability improved
significantly, reflecting a 9% increase in hot-mix asphalt production, a
14% decrease in liquid asphalt costs, and lower fuel and power costs.
Aggregate production increased 34%, and ready-mix concrete production
increased 1%. In addition, nonamortization of goodwill increased APAC's
operating income by $6 million, compared to the December 2000 quarter. The
construction backlog at December 31, 2001, remained exceptionally strong at
$1.5 billion, a 3% decline from the prior year.
APAC is making strides in its business process redesign initiative, which
will improve its organizational structure and more fully leverage APAC's
size and expertise. While it is still early in the process, the effort is
proceeding well with some programs scheduled for implementation in the
second quarter of fiscal 2002. Costs associated with this program are
currently estimated to be in the range of $25 million to $30 million over a
two-year period. While Ashland is pleased with the operating results at
APAC, the costs of the business improvement initiative may impact APAC's
ability to achieve the prior guidance of $150 million to $170 million of
operating income for fiscal 2002.
ASHLAND DISTRIBUTION
Ashland Distribution reported operating income of $9 million for the
quarter ended December 31, 2001, a 10% decline from the $10 million
reported for last year's December quarter. The December 2001 results
include income of $7 million from the settlement of a sorbate class action
antitrust suit. Excluding the impact of this item, the decline in operating
income reflects an extremely weak industrial economy that
12
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ASHLAND DISTRIBUTION (CONTINUED)
continues to adversely affect sales volumes. Although sales revenues
declined 20% from the December 2000 quarter, part of that decline resulted
from the "quality of business" initiative designed to either improve gross
profits or forgo sales to marginal accounts. The improvement in the gross
profit percentage from 15.6% to 16.5% primarily reflects falling
hydrocarbon costs, with most of the improvement coming from industrial
chemicals and plastics distribution. The cost reduction program launched
last year has resulted in the closing and consolidation of distribution
facilities, a reduction in the number of employees and lower marketing
costs.
ASHLAND SPECIALTY CHEMICAL
For the quarter ended December 31, 2001, Ashland Specialty Chemical
reported operating income of $16 million, an 11% decline from the $18
million reported for the December 2000 quarter. Results from five of
Ashland's seven specialty chemical businesses improved reflecting better
sales volumes and/or margins compared to last year. The largest improvement
came in composite polymers, where a 38% increase in operating income
reflected increased sales volumes resulting from the April 2001 acquisition
of Neste Polyester, and improved margins attributed to lower raw material
costs, particularly for styrene. However, those improvements were more than
offset by reduced earnings from electronic chemicals, where strong results
were reported in the first half of fiscal 2001 prior to the onset of the
worldwide downturn in the semiconductor industry. That industry remains
slow, as electronic chemicals sales revenues were down 14% and margins were
down 25% compared to the December 2000 quarter.
VALVOLINE
For the quarter ended December 31, 2001, Valvoline reported operating
income of $11 million, up 10% from the $10 million reported for the
December 2000 quarter. Earnings improved from nearly every Valvoline
business unit, especially in the core lubricants business and Valvoline
Instant Oil Change, which reported record December quarter earnings,
reflecting higher ticket prices. International results improved due in part
to the European introduction of MaxLife, Valvoline's premium motor oil
targeted for older vehicles.
REFINING AND MARKETING
Operating income from Refining and Marketing, which consists primarily of
equity income from Ashland's 38% ownership interest in MAP, amounted to $74
million for the quarter ended December 31, 2001, excluding $29 million in
unfavorable inventory valuation adjustments described in Note C to the
Condensed Consolidated Financial Statements. Operating income for the
quarter ended December 31, 2000, amounted to $109 million. The 32% decline
is primarily due to a $37 million decrease in Ashland's equity income from
MAP's refining and wholesale marketing operations, reflecting a $1.05 per
barrel reduction in MAP's refining and wholesale marketing margin. The
margin decline was due to ample product inventories and reduced demand,
particularly for distillates, resulting from the recession and warmer than
normal weather. Ashland's equity income from MAP's retail operations,
Speedway SuperAmerica (SSA) and the newly formed Pilot Travel Center joint
venture, was essentially unchanged. The positive impacts of higher
merchandise sales volumes and margins and increased product volumes were
offset by the effects of higher operating expenses and a gain recorded on
the sale of 134 SSA non-core stores included in the December 2000 quarter
that added $7 million to Ashland's equity income.
13
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CORPORATE
Corporate expenses amounted to $19 million in the quarter ended December
31, 2001, compared to $16 million for the quarter ended December 31, 2000.
The higher level of expenses reflects increases in unallocated costs for
most corporate general and administrative functions.
NET INTEREST AND OTHER FINANCIAL COSTS
For the quarter ended December 31, 2001, net interest and other financial
costs totaled $36 million, compared to $46 million for the December 2000
quarter. Reflecting strong cash flows from operations over the last year,
total debt outstanding at December 31, 2001, is down $297 million compared
to December 31, 2000. In addition, interest rates on floating rate
obligations have declined.
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 two
revolving credit agreements providing for up to $425 million in borrowings,
neither of which has been used. Under a shelf registration, Ashland can
also issue an additional $600 million in debt and equity securities should
future opportunities or needs arise. Furthermore, Ashland has access to
various uncommitted lines of credit and commercial paper markets. While the
revolving credit agreements contain a covenant limiting new borrowings
based on its stockholders' equity, Ashland could have increased its
borrowings (including any borrowings under these agreements) by up to $1.5
billion at December 31, 2001. Additional permissible borrowings are
increased (decreased) by 150% of any increases (decreases) in Ashland's
stockholders' equity.
Cash flows from operations, a major source of Ashland's liquidity, amounted
to $90 million for the three months ended December 31, 2001, compared to
$187 million for the three months ended December 31, 2000. The decrease
principally reflects decreased cash distributions from MAP ($119 million in
2001, compared to $207 million in 2000). Ashland's cash flows from
operations exceeded its capital requirements for net property additions and
dividends by $29 million for the three months ended December 31, 2001,
providing additional funds for debt repayment and acquisitions.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is
a widely accepted financial indicator of a company's ability to incur and
service debt. Ashland's EBITDA, which represents operating income plus
depreciation, depletion and amortization (each excluding unusual items),
amounted to $180 million for the quarter ended December 31, 2001, compared
to $202 million for the quarter ended December 31, 2000. EBITDA should not
be considered in isolation or as an alternative to net income, operating
income, cash flows from operations, or a measure of a company's
profitability, liquidity or performance under generally accepted accounting
principles.
At December 31, 2001, working capital (excluding debt due within one year)
amounted to $653 million, compared to $801 million at September 30, 2001,
and $698 million at December 31, 2000. Ashland's working capital is
affected by its use of the LIFO method of inventory valuation. That method
valued
14
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
LIQUIDITY (CONTINUED)
inventories below their replacement costs by $67 million at December 31,
2001, $70 million at September 30, 2001, and $73 million at December 31,
2000. Liquid assets (cash, cash equivalents and accounts receivable)
amounted to 90% of current liabilities at December 31, 2001, compared to
95% at September 30, 2001, and 79% at December 31, 2000.
CAPITAL RESOURCES
For the three months ended December 31, 2001, property additions amounted
to $44 million, compared to $40 million for the same period last year.
Property additions and cash dividends for the remainder of fiscal 2002 are
estimated at $213 million and $57 million. At December 31, 2001, Ashland
had remaining authority to purchase 3.9 million shares of its common stock
in the open market. The number of shares ultimately purchased and the
prices Ashland will pay for its stock are subject to periodic review by
management. Ashland anticipates meeting its remaining 2002 capital
requirements for property additions, dividends and scheduled debt
repayments of $60 million from internally generated funds. However,
external financing may be necessary to provide funds for acquisitions or
purchases of common stock.
At December 31, 2001, Ashland's debt level amounted to $1.8 billion,
compared to $1.9 billion at September 30, 2001, and $2.1 billion at
December 31, 2000. Debt as a percent of capital employed amounted to 45% at
December 31, 2001, compared to 46% at September 30, 2001, and 52% at
December 31, 2000. At December 31, 2001, Ashland's long-term debt included
$139 million of floating-rate obligations, and the interest rates on an
additional $92 million of fixed-rate, medium-term notes were effectively
converted to floating rates through interest rate swap agreements. In
addition, Ashland's costs under its sale of receivables program and various
operating leases are based on the floating-rate interest costs on $258
million of third-party debt underlying those transactions. As a result,
Ashland was exposed to fluctuations in short-term interest rates on $489
million of debt obligations at December 31, 2001.
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 reserves, see Note E to
the Condensed Consolidated Financial Statements.
Environmental reserves are subject to numerous inherent 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. Reserves are regularly adjusted as environmental
remediation continues.
15
- --------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
ENVIRONMENTAL MATTERS (CONTINUED)
Ashland does not believe that any liability resulting from environmental
matters, after taking into consideration expected recoveries from insurers,
contributions by other responsible parties and amounts already provided
for, will have a material adverse effect on its consolidated financial
position, cash flows or liquidity. Although environmental remediation could
have a material effect on results of operations if a series of adverse
developments occurs in a particular quarter or fiscal year, Ashland
believes that the chance of such developments occurring in the same quarter
or fiscal year is remote.
CONVERSION TO THE EURO
Beginning January 1, 2002, certain member countries of the European
Economic and Monetary Union began conducting all non-cash transactions in
Euros and circulation of Euro notes and coins for cash transactions
commenced. National notes and coins will be withdrawn no later than June
30, 2002. Ashland conducts business in most of the participating countries
and successfully converted to the Euro without any material effect on
Ashland's consolidated financial position, results of operations, cash
flows or liquidity.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis (MD&A) 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
various information in the Results of Operations and Capital Resources
sections of this MD&A. Estimates as to operating performance and earnings
are based upon a number of assumptions, including those mentioned in MD&A.
Such estimates are also based upon internal forecasts and analyses of
current and future market conditions and trends, management plans and
strategies, weather, operating efficiencies and economic conditions, such
as prices, supply and demand, and cost of raw materials. Although Ashland
believes its expectations are based on reasonable assumptions, it cannot
assure the expectations reflected in MD&A will be achieved. This
forward-looking information may prove to be inaccurate and actual results
may differ significantly from those anticipated if one or more of the
underlying assumptions or expectations proves to be inaccurate or is
unrealized, or if other unexpected conditions or events occur. Other
factors and risks affecting Ashland are contained in Risks and
Uncertainties in Note A to the Consolidated Financial Statements in
Ashland's 2001 Annual Report and in Ashland's Form 10-K for the fiscal year
ended September 30, 2001. Ashland undertakes no obligation to subsequently
update or revise these forward-looking statements.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - As of December 31, 2001, Ashland has 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
associated with 95 waste treatment or disposal sites. These sites are
currently subject to ongoing investigation and remedial activities,
overseen by the 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. The
ultimate costs are not predictable with assurance and could be material.
However, based on its experience with site remediation, 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 does not believe that any liability
at these sites, either individually or in the aggregate, will have a
material adverse effect on Ashland's consolidated financial position, cash
flows or liquidity. For additional information regarding environmental
matters and reserves, see "Management's Discussion and Analysis -
Environmental Matters" and Note E of Notes to Condensed Consolidated
Financial Statements.
OTHER PROCEEDINGS - In addition to the environmental matters described
above, there are pending or threatened against Ashland and its current and
former subsidiaries various claims, lawsuits and administrative
proceedings. Such actions are with respect to commercial matters, product
liability, toxic tort liability, numerous asbestos claims, and other
environmental matters, which seek remedies or damages some of which are for
substantial amounts. While these actions are being contested, their outcome
is not predictable with assurance and could be material to results of
operations in the period they are recognized. However, Ashland does not
believe that any liability resulting from these actions after taking into
consideration expected recoveries from insurers, contributions by other
responsible parties and amounts already provided for, will have a material
adverse effect on its consolidated financial position, cash flows or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Ashland's Annual Meeting of Shareholders was held on January 31,
2002 at the Metropolitan Club, 50 E. RiverCenter Boulevard,
Covington, Kentucky at 10:30 a.m.
(b) Ashland's shareholders at said meeting elected four directors
(Frank C. Carlucci, James B. Farley, Bernadine P. Healy and W.
L. Rouse, Jr.) to serve a three-year term.
Votes
-----
Affirmative Withheld
----------- --------
Frank C. Carlucci 62,022,431 1,097,234
James B. Farley 61,942,433 1,177,232
Bernadine P. Healy 61,881,197 1,238,468
W. L. Rouse, Jr. 62,028,674 1,090,991
Directors who continued in office: Samuel C. Butler, Paul W.
Chellgren, Ernest H. Drew, Roger W. Hale, Mannie L. Jackson,
Patrick F. Noonan, Jane C. Pfeiffer, Theodore M. Solso and
Michael J. Ward.
(c) Ashland's shareholders at said meeting ratified the appointment of
Ernst & Young LLP as independent auditors for fiscal year 2002 by a
vote of 62,169,333 affirmative, to 591,618 negative and 358,714
abstention votes.
ITEM 5. OTHER INFORMATION
During the December 2001 quarter, James J. O'Brien was named senior
vice president and group operating officer of Ashland responsible for
Ashland's chemical businesses. He succeeds David J. D'Antoni, senior vice
president and group operating officer, who assumed responsibility for APAC
and Valvoline when James R. Boyd, also a senior vice president and group
operating officer, announced his retirement. Boyd's retirement was
effective January 31, 2002. Samuel J. Mitchell was named president of
Valvoline and a vice president of Ashland, succeeding O'Brien. In January
2002, Peter M. Bokach announced his retirement as president of Ashland
Distribution. Frank L. "Hank" Waters was named as his successor and also
named a vice president of Ashland. Also, Philip W. Block, administrative
vice president of human resources, has elected to retire effective
September 30, 2002, and has been assigned to assist Ashland's APAC highway
construction group in its current business improvement initiative.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 - Ashland Inc. Computation of Ratios of Earnings to Fixed Charges
and Earnings to Combined Fixed Charges and Preferred Stock
Dividends
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
December 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ashland Inc.
----------------------
(Registrant)
Date: February 12, 2002 /s/ Kenneth L. Aulen
- ----------------------- ------------------------------
Kenneth L. Aulen
Administrative Vice President
and Controller
(Chief Accounting Officer)
Date: February 12, 2002 /s/ David L. Hausrath
- ------------------------ ------------------------------
David L. Hausrath
Vice President and
General Counsel
EXHIBIT INDEX
NO. DESCRIPTION
- --- -----------
12 ASHLAND INC. COMPUTATION OF RATIOS OF EARNINGS
TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
EXHIBIT 12
ASHLAND INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
AND EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(In millions)
Three Months Ended
Years Ended September 30 December 31
------------------------------------------------------------- --------------------
1997 1998 1999 2000 2001 2000 2001
--------- ---------- --------- --------- --------- --------- --------
EARNINGS
Income from continuing operations $ 169 $ 178 $ 291 $ 292 $ 406 $ 59 $ 38
Income taxes 125 114 193 191 275 39 24
Interest expense 148 133 141 189 160 43 35
Interest portion of rental expense 48 40 35 39 41 10 10
Amortization of deferred debt expense 1 1 1 2 2 - -
Undistributed earnings of
unconsolidated affiliates (6) (62) (11) (112) (90) 88 67
Earnings of significant affiliates* 7 - - - - - -
--------- ---------- ----------- ---------- ---------- ---------- ---------
$ 492 $ 404 $ 650 $ 601 $ 794 $ 239 $ 174
========= ========== =========== ========== ========== ========== =========
FIXED CHARGES
Interest expense $ 148 $ 133 $ 141 $ 189 $ 160 $ 43 $ 35
Interest portion of rental expense 48 40 35 39 41 10 10
Amortization of deferred debt expense 1 1 1 2 2 - -
Capitalized interest 1 - - - - - -
Fixed charges of significant affiliates* 5 - - - - - -
--------- ---------- ----------- ---------- ---------- ---------- --------
$ 203 $ 174 $ 177 $ 230 $ 203 $ 53 $ 45
========= ========== =========== ========== ========== ========== ========
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Preferred dividend requirements $ 9 $ - $ - $ - $ - $ - $ -
Ratio of pretax to net income** 1.74 - - - - - -
--------- ---------- ----------- ---------- ---------- ---------- --------
Preferred dividends on a pretax basis 17 - - - - - -
Fixed charges 203 174 177 230 203 53 45
--------- ---------- ----------- ---------- ---------- ---------- --------
$ 220 $ 174 $ 177 $ 230 $ 203 $ 53 $ 45
========= ========== =========== ========== ========== ========== ========
RATIO OF EARNINGS TO
FIXED CHARGES 2.42 2.32 3.67 2.61 3.91 4.48 3.89
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS 2.24 2.32 3.67 2.61 3.91 4.48 3.89
* Significant affiliates are companies accounted for on the equity method
that are 50% or greater owned or whose indebtedness has been directly or
indirectly guaranteed by Ashland or its consolidated subsidiaries.
** Computed as income from continuing operations before income taxes divided
by income from continuing operations, which adjusts dividends on preferred
stock to a pretax basis.