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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 April 30, 1996, there were 64,192,399 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 Six months ended
March 31 March 31
--------------------------- -----------------------
(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) $ 3,072 $ 2,735 $ 6,151 $ 5,659
Other 25 22 119 (1) 37
---------- ---------- ---------- ----------
3,097 2,757 6,270 5,696
COSTS AND EXPENSES
Cost of sales and operating expenses 2,395 2,120 4,745 4,333
Excise taxes on products and merchandise 251 237 489 480
Selling, general and administrative expenses 297 280 586 552
Depreciation, depletion and amortization 97 96 195 191
General corporate expenses 24 20 47 45
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3,064 2,753 6,062 5,601
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OPERATING INCOME 33 4 208 95
OTHER INCOME (EXPENSE)
Interest expense (net of interest income) (42) (41) (86) (78)
Equity income 6 4 11 9
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INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (3) (33) 133 26
Income taxes 1 9 (42) (7)
Minority interest in earnings of subsidiaries - (5) (6) (13)
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NET INCOME (LOSS) (2) (29) 85 (1) 6
Dividends on convertible preferred stock (5) (5) (9) (9)
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INCOME (LOSS) AVAILABLE TO COMMON SHARES $ (7) $ (34) $ 76 $ (3)
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE - Note F
Primary $ (.11) $ (.55) $ 1.18 (1) $ (.05)
Assuming full dilution $ (.11) $ (.55) $ 1.15 $ (.05)
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .55 $ .55
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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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March 31 September 30 March 31
(In millions) 1996 1995 1995
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ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 70 $ 52 $ 60
Accounts receivable 1,662 1,600 1,432
Allowance for doubtful accounts (25) (25) (23)
Construction completed and in progress 19 42 20
Inventories - Note B 810 726 812
Deferred income taxes 89 90 73
Other current assets 112 90 134
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2,737 2,575 2,508
INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates 153 145 154
Investments of captive insurance companies 194 192 188
Cost in excess of net assets of companies acquired 104 107 86
Other noncurrent assets 410 403 440
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861 847 868
PROPERTY, PLANT AND EQUIPMENT
Cost 7,159 7,078 7,042
Accumulated depreciation, depletion and amortization (3,601) (3,508) (3,449)
---------- --------- ----------
3,558 3,570 3,593
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$ 7,156 $ 6,992 $ 6,969
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt due within one year $ 321 $ 272 $ 333
Trade and other payables 1,910 1,778 1,656
Income taxes 40 44 39
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2,271 2,094 2,028
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,749 1,828 1,809
Employee benefit obligations 630 613 597
Reserves of captive insurance companies 183 169 191
Deferred income taxes 33 49 113
Other long-term liabilities and deferred credits 404 405 436
Commitments and contingencies - Note C
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2,999 3,064 3,146
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 176 179 173
STOCKHOLDERS' EQUITY
Convertible preferred stock 293 293 293
Common stockholders' equity 1,417 1,362 1,329
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1,710 1,655 1,622
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$ 7,156 $ 6,992 $ 6,969
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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 6 6
Dividends
Preferred stock (9) (9)
Common stock (33) (33)
Issued common stock under
Acquisition of operations
of other companies 1 39 40
Stock incentive plans 4 4
LESOP loan repayments 11 11
Other changes 8 8
-------- -------- --------- ----------- ------- ---------
BALANCE AT MARCH 31, 1995 $ 62 $ 202 $ 1,090 $ (22) $ (3) $ 1,329
======== ======== ========= =========== ======= =========
BALANCE AT OCTOBER 1, 1995 $ 64 $ 256 $ 1,063 $ (11) $ (10) $ 1,362
Net income 85 85
Dividends
Preferred stock (9) (9)
Common stock (35) (35)
Issued common stock under stock
incentive plans 4 4
LESOP loan repayments 11 11
Other changes (1) (1)
-------- -------- --------- ----------- ------- ---------
BALANCE AT MARCH 31, 1996 $ 64 $ 260 $ 1,104 $ - $ (11) $ 1,417
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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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Six months ended
March 31
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(In millions) 1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 85 $ 6
Expense (income) not affecting cash
Depreciation, depletion and amortization (1) 200 197
Deferred income taxes (14) 13
Other noncash items 15 4
Change in operating assets and liabilities (2) (10) (102)
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276 118
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 1 273
Proceeds from issuance of capital stock 4 1(3)
Loan repayment from leveraged employee stock ownership plan 11 11
Repayment of long-term debt (51) (15)
Increase in short-term debt 21 92
Dividends paid (46) (44)
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(60) 318
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (178) (218)
Purchase of operations - net of cash acquired (24) (192)(3)
Proceeds from sale of operations 1 5
Investment purchases (4) (225) (262)
Investment sales and maturities (4) 223 248
Other-net 5 3
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(198) (416)
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INCREASE IN CASH AND CASH EQUIVALENTS 18 20
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 52 40
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 70 $ 60
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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 March 31, 1996, are not necessarily indicative
of results to be expected for the year ending September 30, 1996.
NOTE B - INVENTORIES
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March 31 September 30 March 31
(In millions) 1996 1995 1995
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<S> <C> <C> <C>
Crude oil $ 342 $ 285 $ 308
Petroleum products 354 284 349
Chemicals and other products 523 491 492
Materials and supplies 68 66 68
Excess of replacement costs over LIFO carrying values (477) (400) (405)
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$ 810 $ 726 $ 812
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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, Ashland and its subsidiaries are parties to numerous
claims and lawsuits (some of which are for substantial amounts).
While these actions are being contested, the outcome of individual
matters is not predictable with assurance. Although any actual
liability is not determinable as of March 31, 1996, 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 six months ended March 31, 1996, Ashland acquired
various chemical distribution and specialty chemical businesses, a
road paving 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 (LOSS) PER SHARE
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Three months ended Six months ended
March 31 March 31
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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 (LOSS) PER SHARE
Income (loss) available to common shares
Net income (loss) $ (2) $ (29) $ 85 $ 6
Dividends on convertible preferred stock (5) (5) (9) (9)
--------- --------- --------- ---------
$ (7) $ (34) $ 76 $ (3)
========= ========= ========= =========
Average common shares and equivalents outstanding 64 61 64 61
========= ========= ========= =========
Earnings (loss) per share $ (.11) $ (.55) $ 1.18 $ (.05)
========= ========= ========= =========
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EARNINGS (LOSS) PER SHARE
ASSUMING FULL DILUTION
Income (loss) available to common shares
Net income (loss) $ (2) $ (29) $ 85 $ 6
Dividends on convertible preferred stock (5) (5) - (9)
Interest on convertible debentures (net of income taxes) - - 2 -
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$ (7) $ (34) $ 87 $ (3)
========= ========= ========= =========
Average common shares and equivalents outstanding 64 61 64 61
Common shares issuable upon
Conversion of debentures - - 3 -
Conversion of preferred stock - - 9 -
--------- --------- --------- ---------
64 61 76 61
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Earnings (loss) per share $ (.11) $ (.55) $ 1.15 $ (.05)
========= ========= ========= =========
7
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
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Three months ended Six months ended
March 31 March 31
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(Dollars in millions except as noted) 1996 1995 1996 1995
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<S> <C> <C> <C> <C>
SALES AND OPERATING REVENUES
Petroleum $ 1,375 $ 1,122 $ 2,607 $ 2,350
SuperAmerica 445 404 901 846
Valvoline 265 238 540 506
Chemical 909 887 1,795 1,705
APAC 181 176 510 451
Coal 139 152 303 308
Exploration 66 45 122 93
Intersegment sales (308) (289) (627) (600)
----------- ----------- ----------- -----------
$ 3,072 $ 2,735 $ 6,151 $ 5,659
=========== =========== =========== ===========
OPERATING INCOME
Petroleum $ (16) $ (51) $ 2 $ (49)
SuperAmerica 6 6 17 23
Valvoline 8 2 20 11
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Total Refining and Marketing Group (2) (43) 39 (15)
Chemical 43 53 81 100
APAC - 1 23 21
Coal 6 14 23 34
Exploration 10 (1) 89 -
General corporate expenses (24) (20) (47) (45)
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$ 33 $ 4 $ 208 $ 95
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EQUITY INCOME
Arch Mineral Corporation $ 4 $ - $ 5 $ 3
Other 2 4 6 6
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$ 6 $ 4 $ 11 $ 9
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OPERATING INFORMATION
Petroleum
Product sales (thousand barrels per day) (1) 365.8 344.8 376.5 352.5
Refining inputs (thousand barrels per day) (2) 342.6 338.1 360.5 329.9
Value of products manufactured per barrel $ 23.58 $ 21.08 $ 22.78 $ 21.26
Input cost per barrel 19.85 18.48 18.88 18.02
----------- ----------- ----------- -----------
Refining margin per barrel $ 3.73 $ 2.60 $ 3.90 $ 3.24
SuperAmerica
Product sales (thousand barrels per day) 71.0 68.0 73.1 70.3
Merchandise sales $ 134 $ 123 $ 273 $ 256
Valvoline lubricant sales (thousand barrels per day) (1) 17.8 18.0 19.1 17.6
APAC construction backlog
At end of period $ 664 $ 599 $ 664 $ 599
Increase (decrease) during period $ 48 $ 76 $ (8) $ 45
Ashland Coal, Inc. (3)
Tons sold (millions) 5.2 5.5 11.2 10.9
Sales price per ton $ 26.57 $ 27.81 $ 26.97 $ 28.14
Arch Mineral Corporation (3)
Tons sold (millions) 7.3 6.8 14.2 14.1
Sales price per ton $ 24.95 $ 26.44 $ 25.39 $ 26.65
Exploration
Net daily production
Natural gas (million cubic feet) (1) 113.5 102.4 112.3 95.6
Nigerian crude oil (thousand barrels) 17.3 16.4 17.7 17.9
Sales price
Natural gas (per thousand cubic feet) $ 2.88 $ 1.93 $ 2.53 $ 1.90
Nigerian crude oil (per barrel) $ 18.17 $ 15.94 $ 17.16 $ 15.89
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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.
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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, which
includes information concerning the outlook of Ashland Petroleum
for the remainder of the fiscal year, the prospects of APAC's
construction operations for the remainder of 1996 and Ashland
Coal's prospective earnings for 1996 and 1997. 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 effecting 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. 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 fiscal year ended September 30, 1995, which is on file
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
CURRENT QUARTER - Ashland recorded a net loss of $2 million for
the three months ended March 31, 1996, compared to a loss of $29
million for the same period last year. Operating income for the
quarter just ended totaled $33 million, compared to $4 million for
last year's second quarter. The increase in earnings was due
primarily to substantial improvements in operating income from
Ashland Petroleum, Valvoline and Ashland Exploration. These
positive comparisons were partially offset by lower earnings from
Ashland Chemical and Ashland Coal. Although down from the March
1995 quarter, Ashland Chemical had its second-best March quarter
ever, as the unfavorable comparison resulted from the
extraordinarily high methanol prices last year.
YEAR-TO-DATE - Net income for the six months ended March 31, 1996,
amounted to $85 million, compared to $6 million for the six months
ended March 31, 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 $31 million, primarily reflecting the same factors
described in the quarter comparison, partially offset by lower
profits from SuperAmerica and an increase in interest expense.
PETROLEUM
CURRENT QUARTER - Ashland Petroleum reported an operating loss of
$16 million for the quarter ended March 31, 1996, compared to a
loss of $51 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 factor for the
improvement in earnings. The refining margin averaged $3.73 a
barrel for the second quarter of fiscal 1996, compared to $2.60 a
barrel in the March 1995 quarter. Results for last year were
negatively impacted by the second warmest winter on record and the
market confusion surrounding the introduction of reformulated
gasoline. Although margins improved from last year, the current
quarter was still adversely affected by rapidly rising crude oil
costs in March and refinery unit
9
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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PETROLEUM (CONTINUED)
outages in January and February, that temporarily reduced crude
oil runs. During March, the price of West Texas Intermediate crude
oil on the New York Mercantile Exchange increased sharply,
beginning the month at $19.44 a barrel and peaking at $24.34 a
barrel before closing at $21.47 a barrel.
During the current quarter, Ashland Petroleum experienced a 17-day
strike by the Oil, Chemical and Atomic Workers (OCAW) union at
Ashland's largest refinery in Catlettsburg, Ky. Normal refinery
operations were continued during this period due to the dedicated
efforts of supervisory personnel until a new agreement was
reached. The provisions of the new OCAW contract will provide more
flexibility in the operation of the refinery which should enhance
Ashland Petroleum's competitive position.
YEAR-TO-DATE - For the six months ended March 31, 1996, Ashland
Petroleum recorded operating income of $2 million, compared to an
operating loss of $49 million for the same period last year. The
majority of the increase in earnings was attributed to a rise in
the refining margin to $3.90 a barrel this year, compared to $3.24
a barrel last year. Throughput volumes were also up for the
year-to-date period with most of the increase attributable to
record throughputs in the first quarter of this year, combined
with reduced throughputs in the first quarter of last year when
the Canton, Ohio refinery had a general maintenance turnaround.
Refining expenses declined 14 cents a barrel compared to the first
six months of last year, due to the increased throughput and
ongoing efforts to cut costs and improve efficiency.
The outlook for the remainder of the fiscal year is good as crude
oil prices are expected to recede to levels more typical of the
past few years. Although world crude oil demand is increasing,
production capacity is keeping pace and Ashland expects no basic
shifts in the supply and demand balance that would sustain higher
prices over the long term. U.S. gasoline demand is strong and
inventories are low relative to prior years. Also, the futures
market is expecting strong gasoline margins throughout the summer
months which should support improved refining margins.
SUPERAMERICA
CURRENT QUARTER - Operating income for the second quarter of
fiscal 1996 totaled $6 million, essentially even with the earnings
for the second quarter of fiscal 1995. Average retail gasoline
margins were about equal with last year's March quarter despite
being compressed late in the current quarter by the higher
wholesale prices associated with March's rapid rise in crude oil
prices. Operating expenses for the March quarter were higher,
reflecting an increase in costs associated with SuperAmerica's
ongoing expansion program. These increased costs were offset by
higher gasoline and merchandise volumes, due to an increase of 33
stores in operation since March 31, 1995.
YEAR-TO-DATE - For the six months ended March 31, 1996,
SuperAmerica's operating income of $17 million declined $6 million
from the same period last year. The decrease in earnings reflected
lower gasoline margins and increased operating expenses, partially
offset by higher sales volumes. The increases in operating
expenses and sales volumes reflect the same factors described in
the quarter comparison. During the first six months of the fiscal
year, SuperAmerica opened 25 new and rebuilt retail outlets. Of
these, 17 were new SuperAmerica stores and four were new Rich Oil
outlets. Net of closures for rebuilds, economic and other reasons,
625 SuperAmerica and 100 Rich Oil units were in operation at March
31, 1996, compared with 598 and 94 at March 31, 1995.
VALVOLINE
CURRENT QUARTER - For the three months ended March 31, 1996,
operating income for Valvoline totaled $8 million, compared to $2
million for the same period last year. The improvement in earnings
primarily reflected higher branded motor oil margins, combined
with increased automotive chemical and R-12 refrigerant sales
volumes and margins. Valvoline Instant Oil Change (VIOC) reported
record March quarter earnings, as did First Recovery, Valvoline's
used motor oil collection business. An
10
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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VALVOLINE (CONTINUED)
increase in the number of VIOC company operated quick lube outlets
from 358 at March 31, 1995, to 368 at March 31, 1996, combined
with higher average car counts and ticket prices, contributed to
VIOC's profit improvement.
YEAR-TO-DATE - For the six months ended March 31, 1996, Valvoline
reported operating income of $20 million, compared to $11 million
for the same period last year. The increase in earnings reflected
the same factors described in the quarterly comparison.
CHEMICAL
CURRENT QUARTER - Ashland Chemical's operating income for the
three months ended March 31, 1996, amounted to $43 million,
representing its second best March quarter ever. However, these
results were down from fiscal 1995's record second quarter
earnings of $53 million, due to extraordinarily high methanol
prices last year. Excluding methanol profits from both quarters,
operating income was ahead of last year, as record second quarter
earnings from the specialty chemical group more than offset a
modest decline from the distribution 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 quarter, Ashland Chemical acquired the shares
of Sociedad Italo Espanola de Resinas, S.A. (SIER, S.A.), a
Spanish unsaturated polyester resins manufacturer. One of three
acquisitions completed during the quarter, 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.
YEAR-TO-DATE - For the six months ended March 31, 1996, operating
income totaled $81 million, compared to $100 million for the same
period last year. The decline in earnings reflected the
exceptionally strong methanol market in 1995, combined with
significant decreases from all of the other petrochemical product
lines, reflecting higher feedstock costs. Partially offsetting
these declines, the specialty chemical group is having a record
year with Composite Polymers and Electronic Chemicals leading the
way.
APAC
CURRENT QUARTER - For the second quarter of fiscal 1996, APAC's
construction operations reported slightly better than break-even
results despite severe winter operating conditions and the normal
seasonal slowdown in construction activity. Earnings for this
year's March quarter exceeded winter costs which are normally
deferred and amortized over the last half of the fiscal year.
Operating income of $1 million for the March 1995 quarter included
a gain on the sale of an aggregate facility.
YEAR-TO-DATE - For the six months ended March 31, operating income
totaled $23 million this year, compared to $21 million last year.
The increase in earnings reflected record revenues in the December
quarter. Backlog at March 31, 1996 of $664 million represented a
record for this date and an increase of 11% from the $599 million
at March 31, 1995. With a strong backlog and no deferred winter
costs to amortize, Construction's outlook is bright for the rest
of the year.
COAL
CURRENT QUARTER - Ashland Coal's operating income totaled $6
million for the quarter ended March 31, 1996, compared to $14
million for the same quarter last year. Results for the current
quarter reflected the adverse effects of the expiration of
attractively priced contracts with Cincinnati Gas & Electric
Company (CG&E) on December 31, 1995, and charges of $4 million
related to Ashland Coal's restructuring of its corporate and
subsidiary support functions. In addition, severe winter weather
adversely affected rail service and surface mine production.
Production and earnings were also
11
<PAGE>
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ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
COAL (CONTINUED)
negatively impacted by a contract miner's unexpected withdrawal of
highwall mining systems from two West Virginia surface mines
during the current quarter. Ashland Coal has announced that it
expects the lost production will be replaced during the third
quarter of this fiscal year, but possibly at slightly higher
costs. The current quarter restructuring is expected to generate
savings over the balance of calendar 1996 at least equal to the
restructuring charges recorded this quarter.
YEAR-TO-DATE - For the six months ended March 31, 1996, operating
income amounted to $23 million, compared to $34 million for the
same period last year. The decrease in earnings reflected the same
factors described in the quarterly comparison. Ashland Coal has
announced that it expects results for calendar 1996 to be much
lower than in 1995, primarily due to the expiration of the CG&E
contracts and price reopeners under other contracts, and the other
adverse factors that affected the March quarter. With full
implementation of the operational changes and restructuring
efforts, and with planned additional production, Ashland Coal also
expects that calendar 1997 earnings will improve from 1996 levels.
EXPLORATION
CURRENT QUARTER - Exploration reported operating income of $10
million for the three months ended March 31, 1996, compared to an
operating loss of $1 million for the same period last year.
Domestic operating income was up $8 million as natural gas prices
increased 49% while daily volumes rose 11%. Natural gas production
averaged 114 million cubic feet a day, the highest since 1979,
reflecting in part last year's acquisition of additional producing
properties in Appalachia. Natural gas production has more than
doubled since 1990, reflecting successful exploratory drilling in
the Gulf of Mexico, accelerated development drilling in
Appalachia, and acquisitions. Earnings from foreign operations
increased $3 million as last year's second quarter included dry
hole costs from an exploratory well offshore Nigeria.
YEAR-TO-DATE - For the first six months of fiscal 1996,
Exploration recorded operating income of $89 million, compared to
essentially break-even results for the same period last year. The
current year included 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 17% increase in daily natural gas production and a 63
cent increase in the average price per thousand cubic feet of
natural gas also contributed to the improvement in operating
income. Higher natural gas production, as well as an increase in
earnings from foreign operations reflected the same factors
described in the quarter comparison.
GENERAL CORPORATE EXPENSES
For the quarter ended March 31, 1996, general corporate expenses
totaled $24 million, compared to $20 million for the March 1995
quarter. This year's results reflected higher incentive
compensation costs.
OTHER INCOME (EXPENSE)
For the six months ended March 31, 1996, interest expense totaled
$86 million, compared to $78 million for the same period last
year. The increase resulted primarily from higher average
outstanding debt levels.
Equity income from Arch Mineral increased $4 million for the
quarter and $2 million for the six months ended March 31, 1996.
The increase in earnings for the quarter was due primarily to
higher production and improved mining costs. Earnings for the
year-to-date period reflected favorable mining conditions at the
Kentucky and West Virginia operations, combined with reduced SG&A
and interest costs. These positive comparisons were partially
offset by a decline in profits at the Illinois and Wyoming
operations due to lower sales volumes and margins.
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 March 31, 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 $222
million outstanding at March 31, 1996.
Cash and cash equivalents at March 31, 1996, were $70 million,
compared to $52 million at September 30, 1995. Cash flows from
operations, a major source of Ashland's liquidity, amounted to
$276 million for the six months ended March 31, 1996, compared to
$118 million for the six months ended March 31, 1995. This
increase was attributed primarily to lower working capital
requirements and the proceeds Ashland received from the bankruptcy
settlement previously discussed.
Working capital at March 31, 1996, was $466 million, compared to
$481 million at September 30, 1995, and $480 million at March 31,
1995. Liquid assets (cash, cash equivalents and accounts
receivable) amounted to 75% of current liabilities at March 31,
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 $477 million below
their replacement costs at March 31, 1996.
CAPITAL RESOURCES
For the six months ended March 31, 1996, property additions
amounted to $178 million, compared to $218 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 $312 million and $47 million,
respectively. Ashland anticipates meeting its remaining 1996
capital requirements for property additions and dividends from
internally generated funds. However, external financing may be
necessary to provide funds for the remaining contractual
maturities of $41 million for long-term debt or for acquisitions.
Ashland's capital employed at March 31, 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 March 31,
1996, compared to 53% at September 30, 1995. At March 31, 1996,
long-term debt included $38 million of floating-rate debt, and the
interest rates on an additional $475 million of fixed-rate debt
were converted to floating rates through interest rate swap
agreements. As a result, future interest costs will fluctuate
based on short-term interest rates in 1996 on $513 million of
Ashland's consolidated long-term debt, as well as any short-term
notes and commercial paper.
At March 31, 1996, Ashland could issue up to an additional $49
million in common stock under a shelf registration. During the six
months ended March 31, 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>
- -------------------------------------------------------------------------------
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 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 March 31, 1996, Ashland was
subject to 83 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) In April 1996, Ashland and the Minnesota Pollution Control Agency
(MPCA) entered into a Stipulation Agreement, resolving various alleged
environmental regulatory violations regarding hazardous waste, water
quality and spill matters at Ashland's St. Paul Park refinery. Ashland will
pay a $149,775 penalty and fund several supplemental environmental
projects.
(3) On or about April 21, 1995, Ashland received an Administrative
Complaint and a Notice of Proposed Assessment of Administrative Civil
Penalty from the USEPA - Region IV. The Complaint alleges 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. The USEPA is seeking an administrative
penalty of $162,500 for these alleged violations. Ashland filed an Answer
and requested an Administrative Hearing on the merits of the complaint. The
parties are presently engaged in settlement discussions.
(4) On March 19, 1996, after consultation with the U.S. Environmental
Protection Agency, the Kentucky Division for Air Quality issued a finding
that Ashland had not demonstrated compliance with certain air regulations
at its Catlettsburg, Kentucky refinery, and referred the matter to USEPA -
Region IV for formal enforcement action. Ashland disputes this finding and
has filed a petition in Kentucky requesting an Administrative Hearing on
the merits of the matter. No action has been taken by either agency.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
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)
Date /s/ Kenneth L. Aulen
------------------------- ------------------------------------
Kenneth L. Aulen
Administrative Vice President
and Controller
(Chief Accounting Officer)
Date /s/ Thomas L. Feazell
------------------------- ------------------------------------
Thomas L. Feazell
Senior Vice President,
General Counsel and Secretary
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM ASHLAND INC.'S 2ND QUARTER 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 70
<SECURITIES> 0
<RECEIVABLES> 1,662
<ALLOWANCES> 25
<INVENTORY> 810
<CURRENT-ASSETS> 2,737
<PP&E> 7,159
<DEPRECIATION> 3,601
<TOTAL-ASSETS> 7,156
<CURRENT-LIABILITIES> 2,271
<BONDS> 1,749
<COMMON> 64
0
293
<OTHER-SE> 1,353
<TOTAL-LIABILITY-AND-EQUITY> 7,156
<SALES> 6,151
<TOTAL-REVENUES> 6,270
<CGS> 5,429
<TOTAL-COSTS> 5,429
<OTHER-EXPENSES> 633
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> 122
<INCOME-TAX> 42
<INCOME-CONTINUING> 85
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.15
</TABLE>
