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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-2918
ASHLAND INC.
(Formerly Ashland Oil, Inc.)
(Exact name of registrant as specified in its charter)
Kentucky 61-0122250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Ashland Drive, Russell, Kentucky 41169
(Address of principal executive offices) (Zip Code)
P.O. Box 391, Ashland, Kentucky 41114
(Mailing Address) (Zip Code)
Registrant's telephone number, including area code (606) 329-3333
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No ____
At July 31, 1995, there were 63,572,678 shares of Registrant's Common Stock
outstanding. One-half of one Right to purchase one-tenth of a share of
Cumulative Preferred Stock, Series of 1987 accompanies each outstanding
share of Registrant's Common Stock.
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PART I - FINANCIAL INFORMATION
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Nine months ended
June 30 June 30
------------------------ ------------------------
(In millions except per share data) 1995 1994 1995 1994
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REVENUES
Sales and operating revenues (including excise taxes) $ 3,256 $ 2,703 $ 8,915 $ 7,481
Other 14 - 51 23
---------- ---------- ---------- ----------
3,270 2,703 8,966 7,504
COSTS AND EXPENSES
Cost of sales and operating expenses 2,481 2,041 6,813 5,565
Excise taxes on products and merchandise 258 227 739 632
Selling, general and administrative expenses 301 264 853 762
Depreciation, depletion and amortization 99 73 290 217
General corporate expenses 22 26 67 68
---------- ---------- ---------- ----------
3,161 2,631 8,762 7,244
---------- ---------- ---------- ----------
OPERATING INCOME 109 72 204 260
OTHER INCOME (EXPENSE)
Interest expense (net of interest income) (47) (29) (125) (86)
Equity income 2 14 11 11
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 64 57 90 185
Income taxes (11) (13) (18) (49)
Minority interest in earnings of subsidiaries (5) - (18) -
---------- ---------- ---------- ----------
NET INCOME 48 44 54 136
Dividends on convertible preferred stock (5) (4) (14) (14)
---------- ---------- ---------- ----------
INCOME AVAILABLE TO COMMON SHARES $ 43 $ 40 $ 40 $ 122
========== ========== ========== ==========
EARNINGS PER SHARE - Note F
Primary $ .69 $ .65 $ .65 $ 2.01
Assuming full dilution $ .66 $ .63 $ .65 $ 1.93
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .25 $ .825 $ .75
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30 September 30 June 30
(In millions) 1995 1994 1994
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 38 $ 40 $ 46
Accounts receivable 1,577 1,346 1,298
Allowance for doubtful accounts (24) (23) (22)
Construction completed and in progress 48 55 51
Inventories - Note B 826 601 696
Deferred income taxes 80 71 60
Other current assets 146 81 72
---------- --------- ----------
2,691 2,171 2,201
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates 154 291 283
Investments of captive insurance companies 200 181 187
Cost in excess of net assets of companies acquired 106 80 76
Prepaid coal royalties 63 - -
Coal supply agreements 54 - -
Other noncurrent assets 315 276 291
---------- --------- ----------
892 828 837
PROPERTY, PLANT AND EQUIPMENT
Cost 7,142 5,898 5,792
Accumulated depreciation, depletion and amortization (3,517) (3,082) (3,020)
---------- --------- ----------
3,625 2,816 2,772
---------- --------- ----------
$ 7,208 $ 5,815 $ 5,810
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt due within one year $ 420 $ 133 $ 159
Trade and other payables 1,716 1,520 1,542
Income taxes 33 35 23
---------- --------- ----------
2,169 1,688 1,724
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,806 1,391 1,381
Accrued pension and other postretirement benefits 581 515 510
Reserves of captive insurance companies 187 173 186
Deferred income taxes 137 30 33
Other long-term liabilities and deferred credits 454 423 418
Commitments and contingencies - Note C
---------- --------- ----------
3,165 2,532 2,528
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES 177 - -
STOCKHOLDERS' EQUITY
Convertible preferred stock 293 293 293
Common stockholders' equity 1,404 1,302 1,265
---------- --------- ----------
1,697 1,595 1,558
---------- --------- ----------
$ 7,208 $ 5,815 $ 5,810
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
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Loan to
leveraged
employee Prepaid
stock contri-
ownership bution
Common Paid-in Retained plan to
(In millions) stock capital earnings (LESOP) LESOP Other Total
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BALANCE AT OCTOBER 1, 1993 $ 60 $ 143 $ 1,008 $ (33) $ (6) $ (10) $ 1,162
Net income 136 136
Dividends
Preferred stock (14) (14)
Common stock (45) (45)
Issued common stock under stock
incentive plans 1 16 17
Allocation of LESOP shares to participants 6 6
Other changes 3 3
-------- -------- --------- ----------- -------- ------- ---------
BALANCE AT JUNE 30, 1994 $ 61 $ 159 $ 1,085 $ (33) $ - $ (7) $ 1,265
======== ======== ========= =========== ======== ======= =========
BALANCE AT OCTOBER 1, 1994 $ 61 $ 159 $ 1,126 $ (33) $ - $ (11) $ 1,302
Net income 54 54
Dividends
Preferred stock (14) (14)
Common stock (50) (50)
Issued 1,250,623 common shares in
the acquisition of certain assets
of Waco Oil and Gas Co. 1 39 40
Issued common stock under continuous
share offering program 1 34 35
Issued common stock under stock
incentive plans 6 6
LESOP loan repayments 16 16
Other changes 15 15
-------- -------- --------- ----------- -------- ------- ---------
BALANCE AT JUNE 30, 1995 $ 63 $ 238 $ 1,116 $ (17) $ - $ 4 $ 1,404
======== ======== ========= =========== ======== ======= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Nine months ended
June 30
---------------------------------
(In millions) 1995 1994
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CASH FLOWS FROM OPERATIONS
Net income $ 54 $ 136
Expense (income) not affecting cash
Depreciation, depletion and amortization (1) 299 226
Deferred income taxes 27 13
Prepaid coal royalties expensed 14 -
Minority interest in earnings of subsidiaries 18 -
Undistributed earnings of unconsolidated affiliates~ (3) (6)
Other noncash items (8) 34
Change in operating assets and liabilities (2) (196) (104)
--------- ---------
205 299
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 304 27
Proceeds from issuance of capital stock 38 17
Loan repayment from leveraged employee stock ownership plan 16 -
Repayment of long-term debt (20) (64)
Increase in short-term debt 150 17
Dividends paid (68) (59)
--------- ---------
420 (62)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (297) (247)
Purchase of operations - net of cash acquired (307) (57)
Proceeds from sale of operations 5 58
Disposals of property, plant and equipment 12 15
Advances on prepaid coal royalties (21) -
Investment purchases (3) (381) (237)
Investment sales and maturities (3) 362 236
--------- ---------
(627) (232)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2) 5
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 40 41
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 38 $ 46
========= =========
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(1) Includes amounts charged to general corporate expenses.
(2) Excludes changes resulting from operations acquired or sold.
(3) Represents primarily investment transactions of captive insurance companies.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - GENERAL
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and Securities and Exchange
Commission regulations, but are subject to any year-end audit
adjustments which may be necessary. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. These financial
statements should be read in conjunction with Ashland's Annual Report
on Form 10-K for the fiscal year ended September 30, 1994. Results of
operations for the periods ended June 30, 1995, are not necessarily
indicative of results to be expected for the year ending September 30,
1995.
NOTE B - INVENTORIES
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June 30 September 30 June 30
(In millions) 1995 1994 1994
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Crude oil $ 323 $ 243 $ 370
Petroleum products 354 286 283
Chemicals and other products 516 421 384
Materials and supplies 67 46 43
Excess of replacement costs over LIFO carrying values (434) (395) (384)
-------- ------- -------
$ 826 $ 601 $ 696
======== ======= =======
NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES
Federal, state and local statutes and regulations relating to the
protection of the environment have a significant impact on the conduct
of Ashland's businesses. For information regarding environmental
expenditures and reserves, see the "Miscellaneous - Governmental
Regulation and Action - Environmental Protection" section of Ashland's
Form 10-K.
Environmental reserves are subject to considerable uncertainties which
affect Ashland's ability to estimate its share of the ultimate costs of
required remediation efforts. Such uncertainties involve the nature and
extent of contamination at each site, the extent of required cleanup
efforts under existing environmental regulations, widely varying costs
of alternate cleanup methods, changes in environmental regulations, the
potential effect of continuing improvements in remediation technology,
and the number and financial strength of other potentially responsible
parties at multiparty sites. As a result, charges to income for
environmental liabilities could have a material effect on results of
operations in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are identified.
However, such charges are not expected to have a material adverse
effect on Ashland's consolidated financial position.
Ashland has numerous insurance policies that provide coverage at
various levels for environmental costs. Ashland is currently involved
in negotiations concerning the amount of insurance coverage for
environmental costs under some of these policies. In addition, various
costs of remediation efforts related to underground storage tanks are
eligible for reimbursement from state administered funds. Probable
recoveries related to certain costs incurred or expected to be incurred
in future years are included in other noncurrent assets.
6
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
In addition, Ashland and its subsidiaries are parties to numerous
claims and lawsuits (some of which are for substantial amounts) with
respect to product liability and commercial and other matters. While
these claims and actions are being contested, the outcome of individual
matters is not predictable with assurance. Although any actual
liability is not determinable as of June 30, 1995, Ashland believes
that any liability resulting from these matters involving Ashland and
its subsidiaries, after taking into consideration Ashland's insurance
coverages and amounts already provided for, should not have a material
adverse effect on Ashland's consolidated financial position.
In a development affecting Ashland Exploration, Columbia Gas
Transmission and Columbia Gas Systems have filed reorganization plans
with the U.S. Bankruptcy Court in Delaware. The plans included a
settlement agreement entered into by Ashland Exploration and the two
Columbia companies, resolving claims between the parties. The Court has
approved the fairness of the settlement agreement and the disclosure
statements allowing both reorganization plans to be voted on by
creditors. Subject to the outcome of the voting process and final
approval by the Bankruptcy Court and other approvals and contingencies,
the negotiated agreement would provide for a $78.5 million payment to
Ashland Exploration, of which 5 percent would be withheld to
potentially satisfy the claims of non-settling producers.
NOTE D - ACQUISITIONS
During the nine months ended June 30, 1995, Ashland acquired the
unsaturated polyester resins, polyester distribution and maleic
anhydride businesses of Aristech Chemical Corporation, the Zerex(R)
antifreeze product line, the northern West Virginia assets of two
natural gas companies, and various other chemical and construction
businesses. These acquisitions were generally accounted for as
purchases and did not have a significant effect on Ashland's
consolidated financial statements.
In February 1995, Ashland purchased from Saarbergwerke AG all of
Ashland Coal's Class B Preferred Stock for $110 million, representing
about 15 percent of Ashland Coal's voting stock. The purchase increased
Ashland's ownership of Ashland Coal from 39 percent to 54 percent. As a
result of this transaction, Ashland Coal has been consolidated into
Ashland's financial statements retroactive to October 1, 1994.
Ashland's investment in Ashland Coal previously had been accounted for
on the equity method.
NOTE E - RECENT ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued its
Statement No. 121 (FAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS 121
requires that certain long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity
expects to hold and use should be based on the fair value of the asset.
FAS 121 requires that most long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. FAS 121 is effective for fiscal
years beginning after December 15, 1995 (Ashland's fiscal 1997), with
earlier application encouraged. Ashland is currently analyzing the
impact that adoption of FAS 121 will have on its financial statements
and whether to adopt the Statement prior to the required date.
7
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE F - COMPUTATION OF EARNINGS PER SHARE
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Three months ended Nine months ended
June 30 June 30
----------------------- ----------------------
(In millions except per share data) 1995 1994 1995 1994
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PRIMARY EARNINGS PER SHARE
Income available to common shares
Net income $ 48 $ 44 $ 54 $ 136
Dividends on convertible preferred stock (5) (4) (14) (14)
--------- --------- --------- ---------
$ 43 $ 40 $ 40 $ 122
========= ========= ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 63 61 62 60
Common shares issuable upon exercise of stock options - - - 1
Share adjustment for LESOP - - - (1)
--------- --------- --------- ---------
63 61 62 60
========= ========= ========= =========
Earnings per share $ .69 $ .65 $ .65 $ 2.01
========= ========= ========= =========
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EARNINGS PER SHARE
ASSUMING FULL DILUTION
Income available to common shares
Net income $ 48 $ 44 $ 54 $ 136
Dividends on convertible preferred stock - - (14) -
Interest on convertible debentures (net of income taxes) 1 1 - 3
--------- --------- --------- ---------
$ 49 $ 45 $ 40 $ 139
========= ========= ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 63 61 62 60
Common shares issuable upon
Exercise of stock options - - - 1
Conversion of debentures 3 3 - 3
Conversion of preferred stock 9 9 - 9
Share adjustment for LESOP - - - (1)
--------- --------- --------- ---------
75 73 62 72
========= ========= ========= =========
Earnings per share $ .66 $ .63 $ .65 $ 1.93
========= ========= ========= =========
8
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended Nine months ended
June 30 June 30
-------------------------- -----------------------------
(Dollars in millions except as noted) 1995 1994 1995 1994
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SALES AND OPERATING REVENUES
Petroleum $ 1,376 $ 1,215 $ 3,726 $ 3,351
SuperAmerica 468 435 1,314 1,240
Valvoline 307 261 813 745
Chemical 929 757 2,635 2,084
Construction 313 300 764 793
Coal 148 - 456 -
Exploration 57 49 150 148
Intersegment sales (342) (314) (943) (880)
---------- ----------- ----------- -----------
$ 3,256 $ 2,703 $ 8,915 $ 7,481
========== =========== =========== ===========
OPERATING INCOME
Petroleum $ 46 $ 9 $ (2) $ 83
SuperAmerica 9 12 33 43
Valvoline 2 12 13 39
---------- ----------- ----------- -----------
Total Refining and Marketing Group 57 33 44 165
Chemical 30 33 130 87
Construction 26 24 47 47
Coal 18 - 51 -
Exploration - 8 (1) 29
General corporate expenses (22) (26) (67) (68)
---------- ----------- ----------- -----------
$ 109 $ 72 $ 204 $ 260
========== =========== =========== ===========
EQUITY INCOME
Arch Mineral Corporation $ (1) $ 7 $ 3 $ 3
Ashland Coal, Inc. - 4 - 2
Other 3 3 8 6
---------- ----------- ----------- -----------
$ 2 $ 14 $ 11 $ 11
========== =========== =========== ===========
OPERATING INFORMATION
Petroleum
Product sales (thousand barrels per day) (F1) 392.6 355.9 365.9 346.2
Refining inputs (thousand barrels per day) (F2) 366.9 334.6 342.2 330.3
Value of products manufactured per barrel $ 24.45 $ 21.69 $ 22.36 $ 20.86
Input cost per barrel 19.55 17.90 18.70 16.10
---------- ----------- ----------- -----------
Refining margin per barrel $ 4.90 $ 3.79 $ 3.66 $ 4.76
SuperAmerica
Product sales (thousand barrels per day) 71.6 70.8 70.7 69.6
Merchandise sales $ 142 $ 138 $ 397 $ 379
Valvoline lubricant sales (thousand barrels per day) (F1) 20.4 19.1 18.5 17.5
Construction backlog
At end of period $ 626 $ 491 $ 626 $ 491
Increase (decrease) during period (F3) $ 27 $ (17) $ 72 $ (4)
Exploration
Net daily production
Natural gas (million cubic feet) (F1) 113.4 90.8 101.5 95.9
Nigerian crude oil (thousand barrels) 18.5 17.1 18.1 18.6
Sales price
Natural gas (per thousand cubic feet) $ 1.99 $ 2.39 $ 1.93 $ 2.48
Nigerian crude oil (per barrel) $ 17.61 $ 15.12 $ 16.48 $ 14.60
Arch Mineral Corporation (F4)
Tons sold (millions) 6.5 7.5 20.6 17.0
Sales price per ton $ 25.73 $ 26.80 $ 26.36 $ 26.36
Ashland Coal, Inc. (F4)
Tons sold (millions) 5.5 5.1 16.4 13.0
Sales price per ton $ 26.99 $ 29.33 $ 27.75 $ 30.15
[FN]
(1) Includes intersegment sales.
(2) Includes crude oil and other purchased feedstocks.
(3) Amounts have been restated to exclude APAC's Arizona operations which
were sold in February 1994.
(4) Ashland's interest is 50% in Arch Mineral and 54% in Ashland Coal (39%
prior to February 1995).
9
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
Current Quarter - Ashland recorded net income of $48 million for the
three months ended June 30, 1995, compared to $44 million for the same
period last year. Operating income for the current quarter totaled $109
million, compared to $72 million for last year's June quarter. The
increase in earnings was due primarily to a substantial improvement in
operating income from Petroleum, resulting from strong refining
margins. In addition, an outstanding performance from Construction,
another excellent quarter from Chemical and good results from Ashland
Coal were major contributors to the quarter's performance. Partially
offsetting these positives were declines in operating income from
Valvoline, Exploration and SuperAmerica, reduced equity income from
Arch Mineral and higher interest expense.
In February, Ashland completed the purchase of all of the Class B
Preferred Stock of Ashland Coal, Inc. from Saarbergwerke AG. Ashland
now owns approximately 54% of the voting stock of Ashland Coal, and
consequently, the results of Ashland Coal have been consolidated
retroactive to the beginning of this fiscal year. Since the prior year
was accounted for on the equity method, comparisons between years are
affected.
Year-to-Date - Net income for the nine months ended June 30, 1995,
amounted to $54 million, compared to $136 million for the nine months
ended June 30, 1994. The decline in earnings is primarily the result of
reduced refining margins for Petroleum, but also reflects declines in
operating income from Exploration, Valvoline and SuperAmerica, as well
as higher interest expense. Partially offsetting these negatives were
record earnings from Chemical, an outstanding performance from
Construction and much improved results from Ashland Coal.
PETROLEUM
Current Quarter - Operating income for Ashland Petroleum was $46
million for the quarter ended June 30, 1995, compared to $9 million for
the same period last year. An increase in the refining margin (the
difference between the value of products manufactured and input cost)
was the primary reason for the increase in earnings. The refining
margin was $4.90 per barrel for the third quarter of fiscal 1995
compared to $3.79 in last year's third quarter. This margin increase
was due to improvement in the Midwest markets as compared to the Gulf
Coast and to higher U.S. gasoline demand which was up 3.5 percent over
last year through June 30. Throughput volumes were up for the third
quarter due to the negative impact in the third quarter last year of a
major maintenance turnaround at the St. Paul Park, Minnesota refinery
and the refineries are now operating more efficiently following
maintenance turnarounds at all three facilities during the last 18
months. Pipeline profits were up due to tariff increases and higher
volumes related to the increased refinery inputs.
Year-to-Date - For the nine months ended June 30, 1995, Ashland
Petroleum recorded an operating loss of $2 million compared to
operating income of $83 million for the same period last year. A
decrease in the refining margin to $3.66 per barrel this year compared
to $4.76 last year accounted for more than the decrease in earnings.
This decrease was mitigated somewhat by the impact of increased
refining inputs. Results for Scurlock Permian were higher due to
improved margins and lower operating costs while the pipelines
benefited from higher tariffs. Looking to the fourth quarter, although
Gulf Coast margins have declined from their late May high, Ashland's
Midwest refinery advantage has partially offset the Gulf Coast drop. In
addition, U.S. gasoline demand has reached historic highs in this
driving season, exceeding 8 million barrels per day in July. However,
results for the fourth quarter will be adversely affected by a charge
related to the previously announced restructuring of Ashland Petroleum.
This restructuring was initially expected to eliminate approximately
250 jobs at an estimated cost of about $25 million. Final costs have
not yet been determined, but over 300 employees accepted the related
voluntary retirement package and additional
10
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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PETROLEUM (CONTINUED)
jobs will be eliminated. The restructuring creates three
cross-functional business units anchored by the three refineries and
organized along geographic lines that will increase the speed and
flexibility to respond to changes in the various markets that Ashland
serves.
SUPERAMERICA
Current Quarter - Operating income for the third quarter of fiscal 1995
totaled $9 million, compared to $12 million for the third quarter of
fiscal 1994. The decrease in earnings was the result of increased
operating expenses and a slight decline in merchandise margins, which
more than offset the positive contributions from increased retail
gasoline margins and higher sales volumes for both gasoline and
merchandise. An increase in the average number of stores in operation
this year contributed to higher gasoline and merchandise volumes and
the increased costs.
Year-to-Date - For the nine months ended June 30, 1995, SuperAmerica's
operating income of $33 million declined $10 million from the same
period last year. The decrease in earnings generally reflected the same
factors described in the quarterly comparison. Although retail gasoline
margins were virtually flat with last year on a year-to-date average
basis, they strengthened considerably in May and June and remain
favorable, reflecting the growth in gasoline demand. During the nine
months ended June 30, 1995, 17 new stores were opened and current plans
anticipate opening 15 more new stores by September 30. At June 30,
1995, 600 stores were operating, compared to 593 stores at June 30,
1994.
VALVOLINE
Current Quarter - For the three months ended June 30, 1995, operating
income for Valvoline totaled $2 million, compared to $12 million for
the same period last year. Improved volumes and margins for branded
motor oil and good results from Valvoline Instant Oil Change were more
than offset by declines from automotive chemicals and international
operations. Continued narrowing in R-12 refrigerant gross margins,
resulting from a glut of product in the marketplace and continuing
confusion surrounding the illegal importation of the product, along
with shrinking antifreeze margins in the face of higher ethylene glycol
prices, led to the decline in automotive chemicals. International
operations are also experiencing margin pressures along with increased
expenses associated with international expansion.
Year-to-Date - For the nine months ended June 30, 1995, Valvoline
reported operating income of $13 million, compared to $39 million for
the same period last year. Results for Valvoline's branded motor oil
business were off approximately one-third from last year. A price
increase in February boosted margins beginning in April and brought
year-to-date margins for branded and packaged goods slightly ahead of
last year. However, the private label business remains intensely
competitive and margins in that business are roughly one-third of the
level realized in 1994. In addition, there has been a shift in volumes
from higher-margin packaged goods sales to lower-margin bulk sales.
Results for automotive chemicals are off significantly due principally
to depressed margins on chemical goods and continued disruption within
the R-12 refrigerant market. Late in the June quarter, warm summer
weather and improving market conditions led to increased sales of
antifreeze and R-12 refrigerant and recent price increases should
improve antifreeze margins. A decline in international results
reflected the same factors described in the quarterly comparison.
11
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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CHEMICAL
Current Quarter - For the third quarter of fiscal 1995, operating
income of $30 million from Ashland Chemical remained strong, although
down somewhat from last year's record June quarter of $33 million.
Results from the distribution and petrochemical businesses increased,
nearly offsetting declines in most specialty lines, which experienced
margin pressure due to increased raw material costs. The increase in
distribution reflected improved sales, while petrochemical results were
ahead of last year on the strength of improved cumene margins.
Year-to-Date - For the nine months ended June 30, 1995, operating
income totaled $130 million, compared to $87 million for the same
period last year. This 49% improvement comes from the distribution and
petrochemical businesses, both of which are well ahead of last year.
Sales are up 26% on slightly higher volumes and significant price
increases in several major products. Specialty chemicals are off 11%
reflecting reduced margins for marine chemicals that have been
compressed by higher raw material costs. During the June quarter,
Ashland Chemical completed three acquisitions, including certain
portions of Aristech Chemical, Vecom International B.V. and Mirea, SpA.
These acquisitions should strengthen existing distribution, specialty
chemical and petrochemical businesses.
CONSTRUCTION
Current Quarter - For the third quarter of fiscal 1995, Construction
reported record June quarter operating income of $26 million, compared
to $24 million for the same period last year. These results were
realized despite unfavorable weather in some markets and resulted from
good margins and reduced administrative costs.
Year-to-Date - For the nine months ended June 30, operating income
totaled $47 million for both 1995 and 1994. Results for 1994 included
$10 million in earnings from the Arizona operations that were sold in
the second and third quarters last year. Operating income from
continuing operations improved $10 million, or 28% this year,
reflecting favorable operating conditions and better margins. Hot mix
asphalt production was up 7% compared to 1994. Construction backlog at
June 30, 1995, was $626 million, a 27% increase from last year,
reflecting significant increases in both the private and public
sectors.
COAL
Current Quarter - As a result of Ashland's acquisition of an additional
15% interest, Ashland Coal has been consolidated retroactive to the
beginning of this fiscal year. Ashland Coal's operating income totaled
$18 million for the quarter ended June 30, 1995, and these results
would be virtually even with last year if results for 1994 had been
restated on a comparable basis. Average sales price per ton declined
$2.34 reflecting sales contract changes, deferral of certain contract
shipments and lower prices under short-term agreements. Cost of sales
per ton declined $1.94 to an average of $22.52 per ton, a record low
for Ashland Coal, reflecting recent cost reduction initiatives. The
impact of the $.40 per ton reduction in gross profit was offset by a 7%
increase in sales tonnage compared to last year's June quarter.
Year-to-Date - For the nine months ended June 30, 1995, operating
income amounted to $51 million, significantly above the same period
last year if results for 1994 had been restated on a comparable basis.
The increase in operating income reflected a return to more normal
operations, following the negative effects of the United Mine Workers
strike and the severe winter weather of January and February 1994 on
last year's results.
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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EXPLORATION
Current Quarter - Ashland Exploration reported essentially break-even
results for the third quarter of fiscal 1995, compared to operating
income of $8 million for the same period last year. Continued
industry-wide weakness in natural gas prices and higher exploration
expenses were the principal factors contributing to a $4 million
decline in domestic operating income. Natural gas production reached
record levels during the quarter, averaging more than 113 million cubic
feet per day. Earnings from foreign operations declined $4 million
primarily reflecting reduced profitability from the producing
properties in Nigeria.
Year-to-Date - For the first nine months of fiscal 1995, Ashland
Exploration recorded an operating loss of $1 million, compared to
income of $29 million for the same period last year. Industry-wide
deterioration in natural gas prices was the primary cause of the $17
million decline in domestic operating income. Earnings from foreign
operations declined $13 million reflecting higher exploration costs and
reduced profitability from the producing properties in Nigeria.
In a development affecting Ashland Exploration, Columbia Gas
Transmission and Columbia Gas Systems have filed reorganization plans
with the U. S. Bankruptcy Court in Delaware. The plans included a
settlement agreement entered into by Ashland Exploration and the two
Columbia companies, resolving claims between the parties. The Court has
approved the fairness of the settlement agreement and the disclosure
statements allowing both reorganization plans to be voted on by
creditors. Subject to the outcome of the voting process and final
approval by the Bankruptcy Court and other approvals and contingencies,
the negotiated agreement would provide for a $78.5 million payment to
Ashland Exploration, of which 5 percent would be withheld to
potentially satisfy the claims of non-settling producers.
GENERAL CORPORATE EXPENSES
General corporate expenses are down $4 million in the quarter and $1
million for the nine months when compared to last year's corresponding
periods. Reflected in both the quarter and year-to-date comparisons
were reduced incentive compensation accruals for the current year,
while the prior year's second quarter included a gain resulting from
the refinancing of certain subsidiary notes, partially offset by an
increase in litigation reserves.
OTHER INCOME (EXPENSE)
Interest expense was up $18 million for the quarter and $39 million for
the nine months compared to last year's periods, reflecting increases
in both short-term and long-term debt outstanding, the additional
obligations resulting from the consolidation of Ashland Coal and higher
interest rates on floating-rate debt.
Equity income from Arch Mineral decreased $8 million for the quarter,
but was even for the nine months when compared to the same periods last
year. The decrease in earnings for the quarter was due primarily to
lower production volume. Spot market demand for high sulfur Illinois
coal was insufficient to replace contracted sales which expired in July
1994. Arch has moved to lower its production capacity in Illinois by
announcing the idling of the Kathleen deep mine in July 1995. Higher
operating costs per ton resulted from poor equipment performance and
higher maintenance expenses at certain West Virginia surface mines.
Earnings for the year-to-date period are even despite the difficulties
encountered in the second and third quarters this year, as last year's
results reflected the negative effects of the UMW strike. Higher sales
and production tonnage this year reflect the acquisition of the
AgipCoal properties on January 31, 1994.
13
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to continue investment
grade ratings on its indebtedness and obtain capital for its financing
needs. Ashland's senior debt ratings are Baa1 from Moody's and BBB from
Standard & Poor's. Ashland has revolving credit agreements providing
for up to $370 million in borrowings, none of which were in use at June
30, 1995. Additionally, Ashland Coal has revolving credit agreements
providing for up to $500 million in borrowings, of which $55 million
was in use at June 30, 1995. During the quarter, Ashland filed
amendments to its shelf registration statement with the Securities and
Exchange Commission to allow for offerings from time to time of up to
$200 million in medium-term notes and $100 million in shares of Ashland
Common Stock, with the net proceeds of the offerings to be used for
general corporate purposes. As of June 30, 1995, $20 million of the
medium-term notes and $35 million of the common stock had been issued.
Ashland also has access to various uncommitted lines of credit and
commercial paper markets, under which short-term notes and commercial
paper of $257 million were outstanding at June 30, 1995. Although
certain debt agreements contain covenants restricting the amount by
which Ashland can increase its indebtedness, Ashland's indebtedness
could have been increased by up to $1.0 billion at June 30, 1995.
Cash and cash equivalents at June 30, 1995, were $38 million, compared
to $40 million at September 30, 1994. Cash flows from operations, a
major source of Ashland's liquidity, amounted to $205 million for the
nine months ended June 30, 1995, compared to $299 million for the nine
months ended June 30, 1994. This decrease was attributed primarily to
lower earnings this year and an increase in working capital
requirements.
Working capital at June 30, 1995, was $522 million, compared to $483
million at September 30, 1994, and $477 million at June 30, 1994.
Liquid assets (cash, cash equivalents and accounts receivable) as a
percent of current liabilities amounted to 73% at June 30, 1995,
compared to 81% at September 30, 1994, and 77% at June 30, 1994.
Ashland's working capital is significantly affected by its use of the
LIFO method of inventory valuation, which valued such inventories at
$434 million below their replacement costs at June 30, 1995.
CAPITAL RESOURCES
For the nine months ended June 30, 1995, property additions amounted to
$297 million, compared to $247 million for the same period last year,
reflecting higher spending levels by the energy and chemical
businesses, including $34 million resulting from the consolidation of
Ashland Coal in 1995. Property additions (including exploration costs
and geophysical expenses) and cash dividends for the remainder of 1995
are estimated at $196 million and $23 million, respectively. Ashland
anticipates meeting its 1995 capital requirements for property
additions and dividends primarily from internally generated funds.
However, external financing may be necessary in providing funds for the
remaining contractual maturities of $40 million for long-term debt or
for acquisitions.
Ashland's capitalization at June 30, 1995, consists of debt due within
one year (10%), long-term debt (43%), deferred income taxes (3%),
minority interest (4%), convertible preferred stock (7%), and common
stockholders' equity (33%). Total debt as a percent of total
capitalization was 53% at June 30, 1995, compared to 48% at September
30, 1994, reflecting this year's acquisitions and the consolidation of
Ashland Coal. At June 30, 1995, long-term debt included $73 million of
floating-rate debt, and the interest rates on an additional $300
million of fixed-rate debt were converted to floating rates through
interest rate swaps. As a result, interest costs will fluctuate with
short-term interest rates in 1995 on 19% of Ashland's long-term debt.
14
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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ENVIRONMENTAL MATTERS
Federal, state and local statutes and regulations relating to the
protection of the environment have resulted in higher operating costs
and capital investments by the industries in which Ashland operates.
Because of the continuing trend toward greater environmental awareness
and increasingly stringent environmental regulations, Ashland believes
that expenditures for environmental compliance will continue to have a
significant effect on the conduct of its businesses. Although it cannot
predict accurately how these developments will affect future operations
and earnings, Ashland does not believe the nature and significance of
its costs will vary significantly from those of its competitors in the
petroleum and chemical industries. For information regarding
environmental expenditures and reserves, see the "Miscellaneous -
Governmental Regulation and Action - Environmental Protection" section
of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties which
affect Ashland's ability to estimate its share of the ultimate costs of
required remediation efforts. Such uncertainties involve the nature and
extent of contamination at each site, the extent of required cleanup
efforts under existing environmental regulations, widely varying costs
of alternate cleanup methods, changes in environmental regulations, the
potential effect of continuing improvements in remedial technology, and
the number and financial strength of other potentially responsible
parties at multiparty sites. As a result, charges to income for
environmental liabilities could have a material effect on results of
operations in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are identified.
However, such charges are not expected to have a material adverse
effect on Ashland's consolidated financial position, cash flow or
liquidity.
15
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings - (1) As of June 30, 1995, Ashland was
subject to 82 notices received from the USEPA either identifying
Ashland as a "potentially responsible party" ("PRP") under CERCLA
and the Superfund Amendment and Reauthorization Act ("SARA") for
potential joint and several liability for cleanup costs in
connection with alleged releases of hazardous substances from
various waste treatment or disposal sites or requesting
information from Ashland relative to the possible involvement at
such sites. These sites are currently subject to ongoing
investigation and remedial activities, overseen by the USEPA in
accordance with procedures established under CERCLA and SARA
regulations, in which Ashland may be participating as a member of
various PRP groups. Generally, the type of relief sought by the
USEPA includes remediation of contaminated soil and/or
groundwater, reimbursement for the costs of site cleanup or
oversight expended by the USEPA, and/or long-term monitoring of
environmental conditions at the sites. Ashland also receives
notices from state environmental agencies pursuant to similar
state legislation. Ashland carefully monitors the investigatory
and remedial activity at many of these sites. Based on its
experience with site remediation, its familiarity with current
environmental laws and regulations, its analysis of the specific
hazardous substances at issue, the existence of other financially
viable PRPs and its current estimates of investigatory, clean-up
and monitoring costs at each site, Ashland believes that its
liability at these sites, either individually or in the aggregate,
after taking into account established reserves, will not have a
material adverse effect on Ashland's consolidated financial
position, cash flow or liquidity but could have a material adverse
effect on results of operations in a particular quarter or fiscal
year. Estimated costs for these matters are recognized in
accordance with generally accepted accounting principles governing
probability and the ability to reasonably estimate future costs.
(2) Ashland received a Notice of Potential Liability from the
Commonwealth of Pennsylvania regarding a crude oil spill incident
in the Delaware River in July 1994 involving the M/V Kentucky,
which Ashland owns and charters under a long-term bareboat charter
to third parties. After having discussions with the Commonwealth
of Pennsylvania on this matter, a settlement has been reached. As
part of the settlement, Ashland has agreed to pay a civil penalty
of $11,200.
(3) In connection with a demand for penalties, Ashland has
received draft Stipulation Agreements from the Minnesota Pollution
Control Agency relating to various alleged environmental
regulatory violations with regards to hazardous waste and water
quality and spill matters at Ashland's St. Paul Park refinery.
Ashland is having discussions with the Minnesota Pollution Control
Agency on this matter.
(4) Ashland recently negotiated an Agreed Order with the Kentucky
Natural Resources and Environmental Protection Cabinet settling
various alleged violations of Kentucky air quality regulations
occurring at Ashland's Catlettsburg refinery during the period
from December 1992 to June 1995. The settlement involves
expenditures by Ashland to implement a number of voluntary
supplemental environmental and pollution prevention projects. In
addition, Ashland agreed to pay the Commonwealth of Kentucky a
civil penalty of $100,000.
(5) On or about April 21, 1995, Ashland received an Administrative
Complaint and a Notice of Proposed Assessment of Administrative
Civil Penalty from the United States Environmental Protection
Agency Region IV. The Complaint alleges that Ashland missed its
April 1, 1994 interim construction deadline and maintained
insufficient records regarding construction of a waste sewer
system at its Catlettsburg, Kentucky refinery. The EPA is seeking
an administrative civil penalty of $162,500 for these alleged
violations. Ashland filed an Answer and has requested an
administrative hearing on the merits of the complaint.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
16
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: August 9, 1995 /s/ Kenneth L. Aulen
----------------------------------
Kenneth L. Aulen
Administrative Vice President and
Controller (Chief Accounting Officer)
Date: August 9, 1995 /s/ Thomas L. Feazell
---------------------------------
Thomas L. Feazell
Senior Vice President,
General Counsel and Secretary
17
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