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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Commission file number 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
1000 Ashland Drive
Russell, Kentucky 41169
Telephone Number: (606) 329-3333
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ___X__
No ____
At July 31, 1996, there were 64,413,082 shares of
Registrant's Common Stock outstanding. One Right to purchase
one-thousandth of a share of Series A Participating
Cumulative Preferred Stock accompanies each outstanding share
of Registrant's Common Stock.
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PART I - FINANCIAL INFORMATION
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended Nine months ended
June 30 June 30
--------------------------- ---------------------------
(In millions except per share data) 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
REVENUES
Sales and operating revenues (including excise taxes) $ 3,481 $ 3,256 $ 9,631 $ 8,915
Other 13 14 133 (1) 51
---------- ---------- ---------- ----------
3,494 3,270 9,764 8,966
COSTS AND EXPENSES
Cost of sales and operating expenses 2,664 2,481 7,410 6,813
Excise taxes on products and merchandise 246 258 734 739
Selling, general and administrative expenses 311 301 897 853
Depreciation, depletion and amortization 97 99 292 290
General corporate expenses 28 22 75 67
---------- ---------- ---------- ----------
3,346 3,161 9,408 8,762
---------- ---------- ---------- ----------
OPERATING INCOME 148 109 356 204
OTHER INCOME (EXPENSE)
Interest expense (net of interest income) (42) (47) (128) (125)
Equity income 5 2 16 11
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 111 64 244 90
Income taxes (30) (11) (72) (18)
Minority interest in earnings of subsidiaries (1) (5) (7) (18)
---------- ---------- ---------- ----------
NET INCOME 80 48 165 (1) 54
Dividends on convertible preferred stock (5) (5) (14) (14)
---------- ---------- ---------- ----------
INCOME AVAILABLE TO COMMON SHARES $ 75 $ 43 $ 151 $ 40
========== ========== ========== ==========
EARNINGS PER SHARE - Note F
Primary $ 1.16 $ .69 $ 2.34 (1) $ .65
Assuming full dilution $ 1.06 $ .66 $ 2.23 $ .65
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .825 $ .825
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(1) Includes a gain of $73 million ($48 million or 74 cents a share after
income taxes) resulting from the settlement of Ashland Exploration's
claims in the bankruptcy reorganization of Columbia Gas Transmission
and Columbia Gas Systems.
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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) 1996 1995 1995
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ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 71 $ 52 $ 38
Accounts receivable 1,705 1,600 1,577
Allowance for doubtful accounts (27) (25) (24)
Construction completed and in progress 54 42 48
Inventories - Note B 804 726 826
Deferred income taxes 100 90 80
Other current assets 116 90 146
---------- --------- ----------
2,823 2,575 2,691
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates 155 145 154
Investments of captive insurance companies 194 192 200
Cost in excess of net assets of companies acquired 123 107 106
Other noncurrent assets 362 403 432
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834 847 892
PROPERTY, PLANT AND EQUIPMENT
Cost 7,268 7,078 7,142
Accumulated depreciation, depletion and amortization (3,678) (3,508) (3,517)
---------- --------- ----------
3,590 3,570 3,625
---------- --------- ----------
$ 7,247 $ 6,992 $ 7,208
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Debt due within one year $ 404 $ 272 $ 420
Trade and other payables 1,859 1,778 1,716
Income taxes 31 44 33
---------- --------- ----------
2,294 2,094 2,169
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,752 1,828 1,806
Employee benefit obligations 614 613 597
Reserves of captive insurance companies 181 169 187
Deferred income taxes 49 49 137
Other long-term liabilities and deferred credits 400 405 438
Commitments and contingencies - Note C
---------- --------- ----------
2,996 3,064 3,165
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 175 179 177
STOCKHOLDERS' EQUITY
Convertible preferred stock 293 293 293
Common stockholders' equity 1,489 1,362 1,404
---------- --------- ----------
1,782 1,655 1,697
---------- --------- ----------
$ 7,247 $ 6,992 $ 7,208
========== ========= ==========
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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
stock
ownership
Common Paid-in Retained plan
(In millions) stock capital earnings (LESOP) Other Total
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<S> <C> <C> <C> <C> <C> <C>
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 common stock under
Acquisition of operations
of other companies 1 39 40
Share offering program 1 34 35
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
======== ======== ========= =========== ======= =========
BALANCE AT OCTOBER 1, 1995 $ 64 $ 256 $ 1,063 $ (11) $ (10) $ 1,362
Net income 165 165
Dividends
Preferred stock (14) (14)
Common stock (53) (53)
Issued common stock under
Stock incentive plans 1 18 19
Employee savings plan 3 3
LESOP loan repayments 11 11
Other changes (4) (4)
-------- -------- --------- ----------- ------- ---------
BALANCE AT JUNE 30, 1996 $ 65 $ 277 $ 1,161 $ - $ (14) $ 1,489
======== ======== ========= =========== ======= =========
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Nine months ended
June 30
--------------------------------
(In millions) 1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 165 $ 54
Expense (income) not affecting cash
Depreciation, depletion and amortization (1) 301 299
Deferred income taxes (8) 27
Other noncash items 24 21
Change in operating assets and liabilities (2) (140) (196)
--------- ---------
342 205
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 11 304
Proceeds from issuance of capital stock 16 38 (3)
Loan repayment from leveraged employee stock ownership plan 11 16
Repayment of long-term debt (97) (20)
Increase in short-term debt 138 150
Dividends paid (70) (68)
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9 420
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (296) (297)
Purchase of operations - net of cash acquired (47) (307)(3)
Proceeds from sale of operations 1 5
Investment purchases (4) (403) (381)
Investment sales and maturities (4) 421 362
Other-net (8) (9)
--------- ---------
(332) (627)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19 (2)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 52 40
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 71 $ 38
========= =========
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(1) Includes amounts charged to general corporate expenses.
(2) Excludes changes resulting from operations acquired or sold.
(3) Excludes $41 million of common stock issued in acquisitions.
(4) Represents primarily investment transactions of captive insurance companies.
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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, 1995. Results of operations for
the periods ended June 30, 1996, are not necessarily indicative of
results to be expected for the year ending September 30, 1996.
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NOTE B - INVENTORIES
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June 30 September 30 June 30
(In millions) 1996 1995 1995
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<S> <C> <C> <C>
Crude oil $ 339 $ 285 $ 323
Petroleum products 345 284 354
Chemicals and other products 526 491 516
Materials and supplies 65 66 67
Excess of replacement costs over LIFO carrying values (471) (400) (434)
-------- ------- -------
$ 804 $ 726 $ 826
======== ======= =======
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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. In addition, various costs
of remediation efforts related to underground storage tanks are
eligible for reimbursement from state administered funds.
In addition to environmental matters, Ashland and its subsidiaries
are parties to numerous claims and lawsuits (some of which are for
substantial amounts). While these actions are being contested, the
outcome of individual matters is not predictable with assurance.
Ashland believes that any liability resulting from these matters,
after taking into consideration Ashland's insurance coverages and
amounts already provided for, should not have a material adverse
effect on Ashland's consolidated financial position.
6
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE D - ACQUISITIONS
During the nine months ended June 30, 1996, Ashland acquired
various chemical distribution and specialty chemical businesses, a
road paving business, a construction materials business, and
certain oil and gas producing properties. These acquisitions were
accounted for as purchases and did not have a significant effect
on Ashland's consolidated financial statements.
NOTE E - EMPLOYEE BENEFIT PLANS
As of March 31, 1996, all shares held by the leveraged employee
stock ownership plan (LESOP) had been allocated to employees'
accounts and the LESOP loan had been fully repaid. For LESOP
participants, Ashland has increased its contributions to the
Employee Savings Plan from 20% to 70% of employee contributions up
to 6% of their qualified earnings. The increased company
contributions will be in the form of Ashland Common Stock.
Ashland's costs under this new program are estimated to be
comparable to its costs under the LESOP.
NOTE F - COMPUTATION OF EARNINGS PER SHARE
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Three months ended Nine months ended
June 30 June 30
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(In millions except per share data) 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Income available to common shares
Net income $ 80 $ 48 $ 165 $ 54
Dividends on convertible preferred stock (5) (5) (14) (14)
--------- --------- --------- ---------
$ 75 $ 43 $ 151 $ 40
========= ========= ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 64 63 64 62
Common shares issuable upon exercise of stock options 1 - 1 -
--------- --------- --------- ---------
65 63 65 62
========= ========= ========= =========
Earnings per share $ 1.16 $ .69 $ 2.34 $ .65
========= ========= ========= =========
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EARNINGS PER SHARE
ASSUMING FULL DILUTION
Income available to common shares
Net income $ 80 $ 48 $ 165 $ 54
Dividends on convertible preferred stock - - - (14)
Interest on convertible debentures (net of income taxes) 1 1 4 -
--------- --------- --------- ---------
$ 81 $ 49 $ 169 $ 40
========= ========= ========= =========
Average common shares and equivalents outstanding
Average common shares outstanding 64 63 64 62
Common shares issuable upon
Exercise of stock options 1 1 1 -
Conversion of debentures 3 2 2 -
Conversion of preferred stock 9 9 9 -
--------- --------- --------- ---------
77 75 76 62
========= ========= ========= =========
Earnings per share $ 1.06 $ .66 $ 2.23 $ .65
========= ========= ========= =========
7
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
- -------------------------------------------------------------------------------------------------------------------------------=---
Three months ended Nine months ended
June 30 June 30
----------------------------- ----------------------------
(Dollars in millions except as noted) 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
SALES AND OPERATING REVENUES
Petroleum $ 1,485 $ 1,376 $ 4,092 $ 3,726
SuperAmerica 511 468 1,412 1,314
Valvoline 350 307 890 813
Chemical 958 929 2,752 2,635
APAC 356 313 866 764
Coal 137 148 440 456
Exploration 52 57 174 150
Intersegment sales (368) (342) (995) (943)
----------- ----------- ----------- -----------
$ 3,481 $ 3,256 $ 9,631 $ 8,915
=========== =========== =========== ===========
OPERATING INCOME
Petroleum $ 45 $ 46 $ 47 $ (2)
SuperAmerica 8 9 25 33
Valvoline 37 2 57 13
----------- ----------- ----------- -----------
Total Refining and Marketing Group 90 57 129 44
Chemical 47 30 127 130
APAC 29 26 53 47
Coal 8 18 30 51
Exploration 2 - 92 (1)
General corporate expenses (28) (22) (75) (67)
----------- ----------- ----------- -----------
$ 148 $ 109 $ 356 $ 204
=========== =========== =========== ===========
EQUITY INCOME
Arch Mineral Corporation $ 3 $ (1) $ 8 $ 3
Other 2 3 8 8
----------- ----------- ----------- -----------
$ 5 $ 2 $ 16 $ 11
=========== =========== =========== ===========
OPERATING INFORMATION
Petroleum
Product sales (thousand barrels per day) (1) 390.2 392.6 381.0 365.9
Refining inputs (thousand barrels per day) (2) 376.0 366.9 365.7 342.2
Value of products manufactured per barrel $ 26.54 $ 24.57 $ 24.06 $ 22.44
Input cost per barrel 21.74 19.26 19.86 18.46
----------- ----------- ----------- -----------
Refining margin per barrel $ 4.80 $ 5.31 $ 4.20 $ 3.98
SuperAmerica
Product sales (thousand barrels per day) 74.8 71.6 73.7 70.7
Merchandise sales $ 152 $ 142 $ 425 $ 398
Valvoline lubricant sales (thousand barrels per day) (1) 19.9 20.5 19.3 18.6
APAC construction backlog
At end of period $ 663 $ 626 $ 663 $ 626
Increase (decrease) during period $ (1) $ 27 $ (9) $ 72
Ashland Coal, Inc. (3)
Tons sold (millions) 5.3 5.5 16.6 16.4
Sales price per ton $ 25.78 $ 26.99 $ 26.59 $ 27.75
Arch Mineral Corporation (3)
Tons sold (millions) 7.3 6.5 21.5 20.6
Sales price per ton $ 25.31 $ 25.73 $ 25.36 $ 26.36
Exploration
Net daily production
Natural gas (million cubic feet) (1) 107.2 113.4 110.6 101.5
Nigerian crude oil (thousand barrels) 17.2 18.5 17.6 18.1
Sales price
Natural gas (per thousand cubic feet) $ 2.19 $ 1.99 $ 2.42 $ 1.93
Nigerian crude oil (per barrel) $ 19.21 $ 17.61 $ 17.82 $ 16.48
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(1) Includes intersegment sales.
(2) Includes crude oil and other purchased feedstocks.
(3) Ashland's ownership interest is 56% in Ashland Coal and 50% in Arch Mineral.
8
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, including information
concerning the availability of Valvoline's R-12 inventories for
1997, the prospects of APAC's construction operations for this
fiscal year, Ashland Coal's prospective earnings for the remainder
of 1996 and the first quarter of fiscal 1997, and the impact of
various environmental proceedings and investigations. Although
Ashland believes that its expectations are based on reasonable
assumptions, it cannot assure that the expectations contained in
such statements will be achieved. Important factors which could
cause actual results to differ materially from those contained in
such statements are discussed below.
Ashland's operations are affected by domestic and international
political, legislative, regulatory and legal actions. Such actions
may include changes in the policies of the Organization of
Petroleum Exporting Countries ("OPEC") or other developments
involving or affecting oil-producing countries, including military
conflict, embargoes, internal instability or actions or reactions
of the government of the United States in anticipation of or in
response to such actions.
Domestic and international economic conditions, such as
recessionary trends, inflation, interest and monetary exchange
rates, as well as changes in the availability and market prices of
crude oil, natural gas and petroleum products, can also have a
significant effect on Ashland's operations. While Ashland
maintains reserves for anticipated liabilities and carries various
levels of insurance, Ashland could be affected by civil, criminal,
regulatory or administrative actions, claims or proceedings
relating to environmental or other matters. In addition, climate
and weather can significantly affect Ashland in several of its
operations such as its construction, natural gas, heating oil and
coal businesses. Other factors and risks affecting Ashland's
revenues and operations are contained in Ashland's Form 10-K for
the fiscal year ended September 30, 1995, which is on file with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
CURRENT QUARTER - Ashland recorded net income of $80 million for
the three months ended June 30, 1996, compared to $48 million for
the same period last year. Operating income for the quarter just
ended totaled $148 million, compared to $109 million for last
year's June quarter. The increase in operating income resulted
primarily from record quarterly earnings from Valvoline and APAC,
combined with a record third quarter from Ashland Chemical. An
increase in equity income from Arch Mineral and a decrease in
interest expense also contributed to the improvement. These
positive comparisons were partially offset by lower earnings from
Ashland Coal and an increase in general corporate expenses.
YEAR-TO-DATE - Net income for the nine months ended June 30, 1996,
amounted to $165 million, compared to $54 million for the nine
months ended June 30, 1995. Results for the current year included
operating income of $73 million ($48 million after income taxes)
from the settlement of Ashland Exploration's claims in the
bankruptcy reorganization of Columbia Gas Transmission and
Columbia Gas Systems. Excluding this unusual item, net income
increased $63 million, reflecting substantial improvements in
operating income from Ashland Petroleum, Valvoline and Ashland
Exploration. APAC and Arch Mineral also reported higher earnings
this year. On the negative side, operating income for
SuperAmerica, Ashland Chemical and Ashland Coal declined from last
year, while general corporate expenses and interest costs rose.
PETROLEUM
CURRENT QUARTER - Operating income for Ashland Petroleum totaled
$45 million for the quarter ended June 30, 1996, compared to $46
million for the same period last year. A decrease in the refining
margin (the difference between the value of products manufactured
and input cost) was largely offset by higher crude oil inputs and
a decrease in refining expenses. The refining margin averaged
$4.80 a barrel for the third quarter of fiscal 1996, compared to
$5.31 a barrel in the June 1995 quarter.
9
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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PETROLEUM (CONTINUED)
Margins were very strong in May, but the uncertainty in crude oil
markets over the timing of Iraq's re-entry into the market
contributed to a decline in margins in June. Ashland Petroleum is
making good progress in reducing refining expenses, which
decreased by 30 cents a barrel compared to a year ago.
The Ashland(R) brand jobber/distributor network has experienced
rapid growth this year. At June 30, 27 jobbers had committed 503
locations in Kentucky, West Virginia and Ohio to the Ashland(R)
brand, compared to four jobbers and 114 committed locations last
year.
YEAR-TO-DATE - For the nine months ended June 30, 1996, Ashland
Petroleum recorded operating income of $47 million, compared to an
operating loss of $2 million for the same period last year. The
improvement in earnings was attributed, in part, to an increase in
the refining margin of 22 cents a barrel, despite substantially
higher crude oil costs. In addition, throughput volumes were up 7%
for the year-to-date period with most of the increase attributable
to record throughputs in this year's first quarter, combined with
reduced throughputs in the first quarter of last year when the
Canton, Ohio refinery had a general maintenance turnaround.
Refining expenses declined 19 cents a barrel, compared to the
first nine months of last year, due to the increased throughput
and ongoing efforts to cut costs and improve efficiency.
SUPERAMERICA
CURRENT QUARTER - Operating income for the third quarter of fiscal
1996 totaled $8 million, compared to $9 million for the third
quarter of fiscal 1995. Lower retail gasoline margins and rising
operating costs more than offset the growth in gasoline and
merchandise sales volumes. Gasoline margins were down almost a
cent a gallon, as increased wholesale costs were not fully
recovered at the retail level. The higher operating costs and
increased sales volumes largely reflect the increase in the number
of units in operation.
YEAR-TO-DATE - For the nine months ended June 30, 1996,
SuperAmerica's operating income of $25 million declined $8 million
from the same period last year. The decrease in earnings reflected
the same factors described in the quarter comparison. During the
first nine months of this fiscal year, SuperAmerica opened 31 new
and rebuilt retail outlets. Of these, 18 were new SuperAmerica
stores and 8 were new Rich Oil outlets. At June 30, 1996, 627
SuperAmerica and 103 Rich Oil units were in operation, compared
with 600 and 93 at June 30, 1995.
VALVOLINE
CURRENT QUARTER - For the three months ended June 30, 1996,
Valvoline reported record quarterly operating income of $37
million, compared to $2 million for the same period last year. The
increase in earnings reflected improved results from nearly all of
Valvoline's business units, including a significant short-term
earnings boost from the sale of R-12, an automotive refrigerant.
R-12 prices escalated rapidly during the current quarter, due to
developing shortages within the market. The U.S. Environmental
Protection Agency banned the production but not the sale of R-12
at the end of 1995 due to its ozone-depleting characteristics.
Valvoline believes it has sufficient inventories of R-12 to supply
customers through 1997. During the quarter just ended, First
Recovery, Valvoline's used motor oil collection business, reported
record quarterly earnings on the strength of higher revenues and
improved operating efficiencies. Valvoline Instant Oil Change
(VIOC) also reported its best quarter ever, in part reflecting
higher average car counts and ticket prices this year. At June 30,
1996, 370 VIOC company operated quick lube outlets were in
operation, compared to 361 last year.
YEAR-TO-DATE - For the nine months ended June 30, 1996, Valvoline
reported operating income of $57 million, compared to $13 million
for the same period last year. The increase in earnings reflected
the same factors described in the quarterly comparison.
10
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
CHEMICAL
CURRENT QUARTER - Ashland Chemical reported record third quarter
operating income of $47 million for the three months ended June
30, 1996, compared to $30 million for the same period last year.
Income from the specialty chemical businesses more than doubled,
led by substantially higher earnings from composite polymers and a
strong performance from the electronic chemicals business. Results
from the distribution businesses were also up 22% from last year's
third quarter, reflecting improvements in almost every division.
Partially offsetting these positive comparisons, petrochemical
profits declined, primarily due to adverse competitive conditions
in the hydrocarbon solvents and methanol markets.
YEAR-TO-DATE - For the nine months ended June 30, 1996, operating
income totaled $127 million, compared to $130 million for the same
period last year. Earnings from petrochemical's methanol business
were down substantially, reflecting the exceptionally strong
methanol market in 1995. Earnings were also down from the other
petrochemical product lines, due mainly to higher feedstock costs
this year. These negative comparisons were partially offset by a
58% improvement in operating income from specialty chemicals, led
by strong earnings from the composite polymers and electronic
chemicals businesses. Last year's acquisition of certain parts of
Aristech Chemical Corporation and other previous acquisitions were
key factors in growing profits from specialty chemicals.
During the current year, Ashland Chemical acquired the shares of
Sociedad Italo Espanola de Resinas, S.A. (SIER, S.A.), a Spanish
unsaturated polyester resins manufacturer. One of five
acquisitions completed during this year, SIER provides Ashland
Chemical's Composite Polymers Division with its first
manufacturing facility in Europe and is part of an ongoing
strategy to expand internationally.
APAC
CURRENT QUARTER - For the three months ended June 30, 1996, APAC's
construction operations reported record quarterly operating income
of $29 million, compared to $26 million for the same period last
year. APAC's results benefited from improved production and sales
in all areas, including asphalt, aggregate and ready-mix concrete.
YEAR-TO-DATE - For the nine months ended June 30, operating income
totaled $53 million this year, compared to $47 million last year.
The increase in earnings reflected record operating income in the
June quarter and strong revenues in the December quarter. Backlog
at June 30, 1996, was $663 million, compared to $626 million last
year. With a healthy backlog and continued emphasis on cost
control, APAC is poised for an outstanding year.
COAL
CURRENT QUARTER - Ashland Coal's operating income totaled $8
million for the quarter ended June 30, 1996, compared to $18
million for the same quarter last year. Results for the current
quarter reflected the continuing substantial adverse effects of
the expiration of attractively priced contracts with Cincinnati
Gas & Electric Company (CG&E) at the end of 1995. Sales volumes
were also down in the current quarter, due to the significant
decrease in production from the Hobet 07 operations, resulting
from the cessation of dragline operations at that complex. In
addition, cost per ton of coal sold rose slightly from the
relatively lower costs achieved in last year's third quarter,
reflecting increased contract mining costs at the Mingo Logan
complex, a three-day cessation of operations at all three union
mining complexes during a "memorial period" declared by the United
Mine Workers of America, increased use of higher-cost purchased coal
resulting from production shortfalls at the West Virginia CSX
operations, and adverse localized mining conditions at one of the
Kentucky mines.
YEAR-TO-DATE - For the nine months ended June 30, 1996, operating
income amounted to $30 million, compared to $51 million for the
same period last year. The decrease in earnings reflected the same
factors described in the quarterly comparison, along with charges
of $4 million related to Ashland Coal's restructuring of its
corporate and subsidiary support functions. Ashland Coal has
announced that it expects results for the September quarter, which
are heavily affected by miners' vacations, to be very weak.
However, results for the December quarter are expected to be very
strong, primarily as a
11
<PAGE>
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
COAL (CONTINUED)
consequence of two major equipment moves scheduled for completion
later in calendar 1996. Once completed, these relocations are
anticipated to lower mining costs, raise production and increase
revenues for Ashland Coal. Anticipated December quarter results
will be reduced if there is a delay in receiving a pending surface
mining permit at the Hobet 21 mine.
EXPLORATION
CURRENT QUARTER - Exploration's operating income for the third
quarter of fiscal 1996 totaled $2 million, compared to essentially
break-even results last year. Domestic operating income increased
$3 million with a 10% increase in the average natural gas price
and lower dry hole costs being the largest components in the
improvement. Earnings from foreign operations were down,
reflecting reduced profitability from existing production in
Nigeria and increased expenses associated with the ongoing
exploration activity in that country.
As previously announced, the second well on the Okwori prospect
offshore Nigeria encountered 297 feet of oil in a number of
reservoirs. A third well, Okwori No. 3 South, has been drilled to
a total depth of 11,810 feet. Ashland's preliminary evaluation
indicates 378 feet of net oil pay in several zones. Casing has
been set and evaluation is ongoing.
YEAR-TO-DATE - For the first nine months of fiscal 1996,
Exploration recorded operating income of $92 million, compared to
a loss of $1 million for the same period last year. Results for
the current year include operating income of $73 million from the
settlement of Ashland Exploration's claims in the bankruptcy
reorganization of Columbia Gas Transmission and Columbia Gas
Systems. A 9% increase in natural gas production and a 49 cent
increase in the average price per thousand cubic feet of natural
gas also contributed to the improvement in operating income.
Natural gas production averaged 111 million cubic feet a day,
reflecting in part last year's acquisitions of additional
producing properties in Appalachia. Earnings from foreign
operations increased $3 million as last year's results included
dry hole costs from the drilling of an exploratory well offshore
Nigeria.
GENERAL CORPORATE EXPENSES
General corporate expenses were up $6 million for the quarter and
$8 million for the nine months ended June 30, 1996, compared to
last year's corresponding periods. Reflected in both the quarter
and year-to-date comparisons were increased costs for incentive
compensation and investment returns on deferred compensation
account balances.
OTHER INCOME (EXPENSE)
For the three months ended June 30, 1996, interest expense totaled
$42 million, compared to $47 million for June 1995 quarter. For
the year-to-date period, interest expense totaled $128 million,
compared to $125 million last year. These fluctuations reflected
the changes in the average outstanding debt levels during these
periods.
Equity income from Arch Mineral increased $4 million for the
quarter and $5 million for the nine months ended June 30, 1996.
The improvement in earnings for the quarter was due primarily to
increased production and coal sales, resulting in part from the
rescheduling of a two-week vacation shut-down for some Arch
Mineral locations to July 1996. The effect of this vacation
shut-down was included in June's results last year. Earnings for
the year-to-date period reflected favorable mining conditions at
the Arch of Kentucky and Arch of West Virginia operations,
combined with reduced SG&A and interest costs. These positive
comparisons were partially offset by a decline in profits at the
Arch of Illinois and Lone Mountain operations due to lower margins
and yields, respectively.
12
<PAGE>
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to obtain capital for
its financing needs and maintain investment grade ratings on its
senior debt of Baa1 from Moody's and BBB from Standard & Poor's.
Ashland and Ashland Coal have revolving credit agreements
providing for borrowings of up to $320 million and $500 million,
respectively, none of which were in use at June 30, 1996. At that
date, Ashland could issue an additional $154 million in
medium-term notes under a shelf registration should future
opportunities or needs arise. Ashland and Ashland Coal also have
access to various uncommitted lines of credit and commercial paper
markets, and had short-term notes and commercial paper of $343
million outstanding at June 30, 1996.
Cash and cash equivalents at June 30, 1996, were $71 million,
compared to $52 million at September 30, 1995. Cash flows from
operations, a major source of Ashland's liquidity, amounted to
$342 million for the nine months ended June 30, 1996, compared to
$205 million for the nine months ended June 30, 1995. This
increase was attributed primarily to an increased level of
earnings and the proceeds Ashland received from the bankruptcy
settlement previously discussed.
Working capital at June 30, 1996, was $529 million, compared to
$481 million at September 30, 1995, and $522 million at June 30,
1995. Liquid assets (cash, cash equivalents and accounts
receivable) amounted to 76% of current liabilities at June 30,
1996, and 78% at September 30, 1995. Ashland's working capital is
significantly affected by its use of the LIFO method of inventory
valuation, which valued such inventories at $471 million below
their replacement costs at June 30, 1996.
CAPITAL RESOURCES
For the nine months ended June 30, 1996, property additions
amounted to $296 million, compared to $297 million for the same
period last year. Property additions (including exploration costs
and geophysical expenses) and cash dividends for the remainder of
fiscal 1996 are estimated at $197 million and $24 million,
respectively. Ashland anticipates meeting its remaining 1996
capital requirements for property additions and dividends from
internally generated funds. External financing may be necessary to
provide funds for acquisitions.
Ashland's capital employed at June 30, 1996, consisted of debt
(52%), deferred income taxes (1%), minority interest (4%),
convertible preferred stock (7%), and common stockholders' equity
(36%). Debt as a percent of capital employed was 52% at June 30,
1996, compared to 53% at September 30, 1995. At June 30, 1996,
long-term debt included $38 million of floating-rate debt, and the
interest rates on an additional $522 million of fixed-rate debt
had been converted to floating rates through interest rate swap
agreements. As a result, future interest costs will fluctuate
based on short-term interest rates for the remainder of 1996 on
$560 million of Ashland's consolidated long-term debt, as well as
any short-term notes and commercial paper.
At June 30, 1996, Ashland could issue up to an additional $49
million in common stock under a shelf registration. During the
nine months ended June 30, 1996, no shares were issued under this
registration.
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 trends toward greater
environmental awareness and increasing regulations, Ashland
believes that expenditures for environmental compliance will
continue to have a significant
13
<PAGE>
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
ENVIRONMENTAL MATTERS (continued)
effect on the conduct of its businesses. Although it cannot
predict accurately how these developments will affect future
operations and earnings, Ashland believes the nature and
significance of its costs will be comparable to those of its
competitors in the petroleum, chemical and extractive industries.
For information on certain specific environmental proceedings and
investigations, see the "Legal Proceedings" section of this Form
10-Q. For information regarding environmental expenditures and
reserves, see the "Miscellaneous - Governmental Regulation and
Action - Environmental Protection" section of Ashland's Form 10-K.
Environmental reserves are subject to considerable uncertainties
which affect Ashland's ability to estimate its share of the
ultimate costs of required remediation efforts. Such uncertainties
involve the nature and extent of contamination at each site, the
extent of required cleanup efforts under existing environmental
regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number
and financial strength of other potentially responsible parties at
multiparty sites. As a result, charges to income for environmental
liabilities could have a material effect on results of operations
in a particular quarter or fiscal year as assessments and
remediation efforts proceed or as new remediation sites are
identified. However, such charges are not expected to have a
material adverse effect on Ashland's consolidated financial
position, cash flow or liquidity.
14
<PAGE>
PART II-OTHER INFORMATION
- ---------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS - (1) As of June 30, 1996, Ashland was
subject to 76 notices received from the USEPA and similar state
agencies identifying Ashland as a "potentially responsible party"
("PRP") under Superfund or similar state laws for potential joint and
several liability for cleanup costs in connection with alleged
releases of hazardous substances from various waste treatment or
disposal sites. These sites are currently subject to ongoing
investigation and remedial activities, overseen by the USEPA or a
state agency in accordance with procedures established under
regulations, in which Ashland may be participating as a member of
various PRP groups. Generally, the type of relief sought includes
remediation of contaminated soil and/or groundwater, reimbursement for
the costs of site cleanup or oversight expended, and/or long-term
monitoring of environmental conditions at the sites. Ashland carefully
monitors the investigatory and remedial activity at many of these
sites. Based on its experience with site remediation, its familiarity
with current environmental laws and regulations, its analysis of the
specific hazardous substances at issue, the existence of other
financially viable PRPs and its current estimates of investigatory,
clean-up and monitoring costs at each site, Ashland believes that its
liability at these sites, either individually or in the aggregate,
after taking into account established reserves, will not have a
material adverse effect on Ashland's consolidated financial position,
cash flow or liquidity but could have a material adverse effect on
results of operations in a particular quarter or fiscal year.
Estimated costs for these matters are recognized in accordance with
generally accepted accounting principles governing probability and the
ability to reasonably estimate future costs.
(2) 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 ("USEPA") Region IV. The Complaint, which sought an
administrative penalty of $162,500, alleged that Ashland missed its
April 1, 1994 interim construction deadline and maintained
insufficient records regarding construction of a wastewater system at
its Catlettsburg, Kentucky refinery. On July 2, 1996, the USEPA filed
a motion to dismiss this Complaint with permission to refile at a
later date in order to conduct a further investigation into this
matter as well as Ashland's compliance with certain benzene and
volatile organic compound regulations applicable to the wastewater
system. The USEPA's motion was granted on August 2, 1996.
(3) On March 19, 1996, after consultation with the USEPA, the
Kentucky Division for Air Quality issued a finding that Ashland had
not demonstrated compliance with certain air regulations regarding
volatile organic compounds at its Catlettsburg, Kentucky refinery, and
referred the matter to USEPA - Region IV for formal enforcement
action. Ashland filed a petition requesting a hearing before a
Kentucky administrative hearing officer on the merits of the matter
which has now been scheduled for October. Separately, the USEPA
recently issued a Notice of Violation to Ashland regarding this
matter.
ITEM 2. CHANGES IN SECURITIES
As reported in Ashland's Form 8-K filed on May 16, 1996,
Ashland's shareholder rights plan adopted in 1986 expired upon the
close of business on May 15, 1996 and was replaced by a new rights
plan effective May 16, 1996. A description of the new rights plan and
the nonvoting Preferred Stock Purchase Rights granted thereunder is
contained in the Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
As described above, a report on Form 8-K was filed by Ashland on
May 16, 1996 to disclose that on May 16, 1996, the Board of Directors
of Ashland Inc. approved a shareholder rights plan to take effect at
the close of business on May 16, 1996, which replaced Ashland's rights
plan which expired at the close of business on May 15, 1996.
15
<PAGE>
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)
/s/ Kenneth L. Aulen
Date August 13, 1996 ------------------------------
Kenneth L. Aulen
Administrative Vice President and
Controller
(Chief Accounting Officer)
Date August 13, 1996 /s/ Thomas L. Feazell
------------------------------
Thomas L. Feazell
Senior Vice President,
General Counsel and Secretary
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