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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, 1998
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, 1998, there were 75,964,694 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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<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
-------------------------- -------------------------
(In millions except per share data) 1998(1) 1997 1998(1) 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Sales and operating revenues (including excise taxes) $ 1,772 $ 3,346 $ 3,699 $ 6,891
Equity income (2) 49 4 87 7
Other 33 22 73 50
---------- --------- ---------- ----------
1,854 3,372 3,859 6,948
COSTS AND EXPENSES
Cost of sales and operating expenses 1,445 2,594 3,013 5,359
Excise taxes on products and merchandise - 244 - 495
Selling, general and administrative expenses 232 337 453 671
Depreciation, depletion and amortization 83 128 167 262
---------- --------- ---------- ----------
1,760 3,303 3,633 6,787
---------- --------- ---------- ----------
OPERATING INCOME 94 69 226 161
Interest expense (net of interest income) (40) (45) (71) (90)
---------- --------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST 54 24 155 71
Income taxes (19) (12) (58) (26)
Minority interest in earnings of subsidiaries (7) (10) (16) (19)
---------- --------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 28 2 81 26
Income from discontinued operations - 5 - 17
---------- --------- ---------- ----------
NET INCOME 28 7 81 43
Dividends on convertible preferred stock - (5) - (10)
---------- --------- ---------- ----------
NET INCOME AVAILABLE TO COMMON SHARES $ 28 $ 2 $ 81 $ 33
========== ========== ========== ==========
EARNINGS PER SHARE - Note G
Basic
Income from continuing operations $ .37 $ (.05) $ 1.07 $ .25
Income from discontinued operations - .08 - .26
---------- --------- ---------- ----------
Net income $ .37 $ .03 $ 1.07 $ .51
========== ========== ========== ==========
Diluted
Income from continuing operations $ .37 $ (.05) $ 1.05 $ .25
Income from discontinued operations - .08 - .25
---------- --------- ---------- ----------
Net income $ .37 $ .03 $ 1.05 $ .50
========== ========== ========== ==========
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275 $ .55 $ .55
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</TABLE>
(1) Effective January 1, 1998, Ashland and Marathon Oil Company formed
Marathon Ashland Petroleum LLC (MAP), combining the refining,
marketing and transportation operations of the two companies. Marathon
has a 62% interest in MAP and Ashland holds a 38% interest, which is
accounted for using the equity method of accounting. For comparison
purposes, Ashland changed its method of accounting for the businesses
contributed to MAP to the equity method effective October 1, 1997, the
beginning of Ashland's current fiscal year, restating results for the
quarter ended December 31, 1997. The change had no effect on net
income, but reduced revenues, costs, assets and liabilities, and
changed certain components of cash flow.
(2) Effective October 1, 1997, Ashland adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
As a result, equity income is now included in operating income, with
prior periods restated.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
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ASHLAND INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------------
March 31 September 30 March 31
(In millions) 1998(1) 1997 1997
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ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 31 $ 268 $ 107
Accounts receivable 1,153 1,754 1,817
Allowance for doubtful accounts (20) (24) (26)
Inventories - Note A 525 729 805
Deferred income taxes 105 119 114
Other current assets 125 149 168
---------- ---------- ----------
1,919 2,995 2,985
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 2,074 - -
Cost in excess of net assets of companies acquired 184 120 137
Coal supply agreements and other intangible assets 209 237 167
Net assets of discontinued operations held for sale 41 18 358
Other noncurrent assets 383 516 552
---------- ---------- ----------
2,891 891 1,214
PROPERTY, PLANT AND EQUIPMENT
Cost 4,134 7,471 7,576
Accumulated depreciation, depletion and amortization (1,889) (3,580) (3,744)
---------- ---------- ----------
2,245 3,891 3,832
---------- ---------- ----------
$ 7,055 $ 7,777 $ 8,031
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Debt due within one year $ 304 $ 93 $ 282
Trade and other payables 1,164 2,045 2,079
Income taxes 50 123 39
---------- ---------- ----------
1,518 2,261 2,400
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,697 1,639 2,058
Employee benefit obligations 772 854 877
Reserves of captive insurance companies 176 161 171
Other long-term liabilities and deferred credits 542 565 463
Commitments and contingencies - Note E
---------- ---------- ----------
3,187 3,219 3,569
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 283 273 250
COMMON STOCKHOLDERS' EQUITY 2,067 2,024 1,812
---------- ---------- ----------
$ 7,055 $ 7,777 $ 8,031
========== ========== ==========
- ----------
1) See footnote (1) on Page 2.
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred Common Paid-in Retained
(In millions) stock stock capital earnings Other Total
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<S> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 1, 1996 $ 293 $ 64 $ 280 $ 1,185 $ (8) $ 1,814
Net income 43 43
Dividends
Preferred stock (10) (10)
Common stock (35) (35)
Issued common stock under
Preferred stock conversion (290) 9 281 -
Stock incentive plans 1 20 21
Employee savings plan 1 1
Preferred stock redemption (3) (3)
Other changes (19) (19)
------- --------- -------- ---------- -------- --------
BALANCE AT MARCH 31, 1997 $ - $ 74 $ 582 $ 1,183 $ (27) $ 1,812
======= ========= ======== ========== ======== ========
BALANCE AT OCTOBER 1, 1997 $ - $ 75 $ 605 $ 1,379 $ (35) $ 2,024
Net income 81 81
Dividends on common stock (42) (42)
Issued common stock under
Stock incentive plans 10 10
Acquisition of operations
of other companies 1 1 3 5
Other changes (2) (9) (11)
------- --------- -------- ---------- -------- --------
BALANCE AT MARCH 31, 1998 $ - $ 76 $ 614 $ 1,421 $ (44) $ 2,067
======= ========= ======== ========== ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
Six months ended
March 31
-------------------------
(In millions) 1998(1) 1997
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<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS
Income from continuing operations $ 81 $ 26
Expense (income) not affecting cash
Depreciation, depletion and amortization 167 262
Deferred income taxes 19 26
Equity income from affiliates (87) (7)
Dividends received from equity affiliates 41 5
Other noncash items 16 27
Change in operating assets and liabilities (2) (255) (219)
--------- ---------
(18) 120
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt 150 87
Proceeds from issuance of capital stock 7 14
Proceeds from sale-leaseback transactions 56 -
Repayment of long-term debt (154) (115)
Increase in short-term debt 216 146
Dividends paid (46) (47)
--------- ---------
229 85
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (150) (186)
Purchase of leased assets associated with the formation of MAP (254) -
Purchase of operations - net of cash acquired (145) (44)
Proceeds from sale of operations 26 -
Investment purchases (3) (152) (57)
Investment sales and maturities (3) 248 80
Other - net (21) 10
--------- ---------
(448) (197)
--------- ---------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS (237) 8
Cash used by discontinued operations - (5)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (237) 3
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 268 104(4)
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 31 $ 107
========= =========
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</TABLE>
(1) See footnote (1) on Page 2.
(2) Excludes changes resulting from operations acquired or sold.
(3) Represents primarily investment transactions of captive insurance
companies.
(4) Includes $27 million of cash and cash equivalents of Arch Mineral
Corporation that was presented on a consolidated basis effective
October 1, 1996.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL REPORTING
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations, 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, 1997. Results of operations for
the periods ended March 31, 1998, are not necessarily indicative
of results to be expected for the year ending September 30, 1998.
<TABLE>
<CAPTION>
INVENTORIES
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March 31 September 30 March 31
(In millions) 1998 1997 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chemicals $ 374 $ 341 $ 357
Petroleum products 52 289 329
Other products 125 174 177
Crude oil - 277 345
Materials and supplies 36 64 67
Excess of replacement costs over LIFO carrying values (62) (416) (470)
-------- ------- -------
$ 525 $ 729 $ 805
======== ======= =======
</TABLE>
NOTE B - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
In addition to the restatement for discontinued operations
described in Note C, the financial statements and information by
industry segment for the periods ended March 31, 1997, have been
restated for three other items. None of these restatements had any
impact on net income or earnings per share.
Ashland Coal, Inc. and Arch Mineral Corporation merged on July 1,
1997, into a new corporation known as Arch Coal, Inc., in which
Ashland has a 55% ownership interest. Beginning in the September
1997 quarter, Arch Coal was consolidated in Ashland's financial
statements. Prior interim quarters in fiscal 1997 were restated to
reflect Arch Mineral on a consolidated basis for comparison
purposes. Arch Mineral was previously accounted for on the equity
method.
Effective October 1, 1997, Ashland adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." As a result, equity income is now included in
operating income, with prior periods restated.
Effective October 1, 1997, responsibility for marketing of the
petrochemicals and lube base stocks manufactured by Ashland
Petroleum was transferred from Ashland Chemical and Valvoline to
Refining and Marketing, now MAP. Information by industry segment
for prior periods was restated to reflect the transfer.
6
<PAGE>
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ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE C - DISCONTINUED OPERATIONS
On July 1, 1997, Ashland sold the domestic exploration and
production operations of Blazer Energy Corporation. On May 6,
1998, Ashland completed the sale of its exploration and production
operations in Nigeria. The transaction will be reflected in the
June quarter and is expected to result in a modest gain. In
Ashland's view, the transaction also resolves and concludes
previous disputes between Ashland Inc., the government of Nigeria
and applicable governmental agencies. Accordingly, results from
the Exploration segment are shown as discontinued operations with
prior periods restated. Components of amounts reflected in the
income statements, balance sheets and cash flow statements are
presented in the following table.
<TABLE>
<CAPTION>
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Three months ended Six months ended
March 31 March 31
-------------------------- ----------------------------
(In millions) 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ - $ 74 $ - $ 154
Costs and expenses - (70) - (138)
---------- ---------- ---------- ----------
Operating income - 4 - 16
Income tax benefit (expense) - 1 - 1
---------- ---------- ---------- ----------
Net income $ - $ 5 $ - $ 17
========== ========== ========== ==========
BALANCE SHEET DATA
Current assets $ 98 $ 88
Investments and other assets 1 8
Property, plant and equipment - net 52 428
Current liabilities (57) (69)
Noncurrent liabilities (53) (97)
---------- ----------
Net assets held for sale $ 41 $ 358
========== ==========
CASH FLOW DATA
Cash flows from operations $ - $ 14
Cash flows from investment - (19)
---------- ----------
Cash used by discontinued operations $ - $ (5)
========== ==========
</TABLE>
NOTE D - ACQUISITIONS
During the six months ended March 31, 1998, APAC acquired 10
Missouri-based companies known as the Masters-Jackson group,
strengthening APAC's capabilities in asphalt production and
paving, concrete paving, aggregate production and bridge-building.
Valvoline acquired the Eagle One(R) brand of premium automotive
appearance products. In addition, Ashland Chemical made several
smaller acquisitions to expand its distribution and specialty
chemical businesses and APAC acquired several smaller construction
businesses. Eagle One and one of the smaller APAC acquisitions
were acquired by the issuance of a total of $32 million in Ashland
common stock and were accounted for as poolings of interests.
Prior periods were not restated since the effects would have been
insignificant. The other acquisitions were accounted for as
purchases and did not have a significant effect on Ashland's
consolidated financial statements.
In March 1998, Arch Coal announced an agreement to acquire
Atlantic Richfield's (ARCO) domestic coal operations in a
transaction valued at $1.14 billion. A resulting new joint venture
known as Arch Western
7
<PAGE>
- ------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE D - ACQUISITIONS (CONTINUED)
Resources LLC will include ARCO's Colorado, Utah, and Wyoming
mines and Arch's Wyoming operations. Arch will own 99% of the new
venture and ARCO will own 1%. The transaction is scheduled to
close on June 1, 1998. Consummation is conditioned upon obtaining
all necessary governmental and regulatory consents and other
customary conditions. The boards of directors of Arch Coal and
ARCO have approved the transaction.
This transaction will make Arch the No. 2 U.S. coal producer with
annual sales of nearly 110 million tons and revenues of almost $2
billion. Strategically positioned in eastern and western coal
markets, Arch will be better able to serve electric utilities as
they adapt to deregulation and stricter environmental standards in
the year 2000. For more information on this transaction, refer to
Ashland's Form 8-K filed on March 23, 1998.
In connection with the transaction, Arch requested PNC Markets,
Inc. and J. P. Morgan Securities, Inc. to arrange a $1.575 billion
financing for Arch Western and Arch Coal, in the aggregate. While
the facilities for each company are structured to stand alone with
no guarantees, they will be structured to allow for a
substantially free flow of funds between Arch Western and Arch
Coal. In support of the transaction, PNC Bank, National
Association and Morgan Guaranty Trust Company of New York have
each committed $975 million and $600 million, respectively, for a
total of $1.575 billion. The financing consists of three 5-year
facilities: a $675 million non-amortizing term loan to Arch
Western, a $300 million fully amortizing term loan to Arch Coal,
and a $600 million revolver to Arch Coal.
Borrowings under the Arch Coal credit facilities will be used to
finance the acquisition of ARCO's operations, to pay related fees
and expenses, to refinance existing corporate debt and for general
corporate purposes. Borrowings under the Arch Western credit
facility will be used to fund a cash distribution by Arch Western
to ARCO of $700 million. The Arch Western credit facility is not
guaranteed by Arch Coal. None of these facilities are guaranteed
by Ashland.
NOTE E - LITIGATION, CLAIMS AND CONTINGENCIES
Ashland is subject to various federal, state and local
environmental laws and regulations that require remediation
efforts at multiple locations, including operating facilities,
previously owned or operated facilities, and Superfund or other
waste sites. 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
that affect Ashland's ability to estimate its share of the
ultimate costs of required remediation efforts. Such uncertainties
involve the nature and extent of contamination at each site, the
extent of required cleanup efforts under existing environmental
regulations, widely varying costs of alternate cleanup methods,
changes in environmental regulations, the potential effect of
continuing improvements in remediation technology, and the number
and financial strength of other potentially responsible parties at
multiparty sites.
During 1997, the U.S. Environmental Protection Agency (EPA)
completed comprehensive inspections of three refineries owned by
Ashland prior to the formation of Marathon Ashland Petroleum LLC
(MAP),
8
<PAGE>
- ------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE E - LITIGATION, CLAIMS AND CONTINGENCIES (CONTINUED)
which evaluated Ashland's compliance with federal environmental
laws and regulations at those facilities. Under the terms of the
agreements pursuant to which the refineries were conveyed to MAP,
Ashland agreed to retain responsibility for matters arising out of
these inspections, including commencement of work as soon as
practical on certain enumerated projects. Ashland continues to
cooperate and participate in discussions with the EPA concerning
the results of these inspections, including discussions about the
nature and extent of any additional remediation actions or
equipment modifications or upgrades that may be required to
respond to the findings of the inspections.
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 does not believe that any liability resulting from these
matters, after taking into consideration its insurance coverages
and amounts already provided for, will have a material adverse
effect on its consolidated financial position, cash flows or
liquidity. However, such matters could have a material effect on
results of operations in a particular quarter or fiscal year as
they develop or as new issues are identified.
NOTE F - REFINING AND MARKETING JOINT VENTURE
Effective January 1, 1998, Ashland and Marathon Oil Company formed
Marathon Ashland Petroleum LLC (MAP), combining the refining,
marketing and transportation operations of the two companies.
Marathon has a 62% interest in MAP and Ashland holds a 38%
interest, which is accounted for using the equity method of
accounting. For comparison purposes, Ashland changed its method of
accounting for the businesses contributed to MAP to the equity
method effective October 1, 1997, the beginning of Ashland's
current fiscal year, restating results for the quarter ended
December 31, 1997. The change had no effect on net income, but
reduced revenues, costs, assets and liabilities, and changed
certain components of cash flow.
The following table sets forth certain unaudited pro forma
financial information for Ashland assuming MAP was formed as of
the beginning of both fiscal 1998 and 1997. This pro forma
financial information may not be indicative of the results of
operations for Ashland that would have resulted if the transaction
had occurred as of the dates assumed or which will be obtained in
the future.
<TABLE>
<CAPTION>
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Six months ended
March 31
-----------------------
(In millions except per share data) 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 3,790 $ 3,626
Income from continuing operations (1) 34 33
Net income 34 50
Diluted earnings per share
Income from continuing operations (1) .44 .35
Net income .44 .61
</TABLE>
---------
(1) Excluding inventory adjustments associated with the formation
of MAP and changes in MAP's inventory market valuation
reserves, pro forma income from continuing operations would
have been $82 million ($1.07 per share) in 1998 and $50
million ($.61 per share) in 1997. Reported income from
continuing operations, excluding these inventory adjustments,
was $79 million ($1.02 per share) in 1998 and $26 million
($.25 per share) in 1997.
9
- -------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE F - REFINING AND MARKETING JOINT VENTURE (CONTINUED)
Unaudited income statement information for MAP for the three
months ended March 31, 1998, follows (in millions). Such results
included inventory adjustments associated with the formation of
MAP and changes in MAP's inventory market valuation reserve. The
reserve reflects the excess of the LIFO cost of MAP's crude oil
and refined product inventories over their net realizable values.
These adjustments increased MAP's income from operations by $9
million.
Sales $ 4,589
Income from operations 138
Net income 141
MAP is organized as a limited liability corporation (LLC) that has
elected to be taxed as a partnership. Therefore, the parents are
responsible for income taxes applicable to their share of MAP's
taxable income. The net income reflected above for MAP does not
include any provision for income taxes which will be incurred by
MAP's parents.
NOTE G - COMPUTATION OF EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (FAS 128), "Earnings per
Share." FAS 128 replaced the previously reported primary and fully
diluted earnings per share (EPS) with basic and diluted EPS.
Unlike primary EPS, basic EPS excludes any dilutive effects of
options and convertible securities. Diluted EPS is very similar to
the previously reported fully diluted EPS. EPS amounts for all
periods have been presented, and where necessary, restated to
conform to the FAS 128 requirements. The following table sets
forth the computation of basic and diluted EPS from continuing
operations. Common shares issuable upon conversion of convertible
preferred stock and convertible debentures which were outstanding
during the periods ended March 31, 1997, were not included in the
computation of diluted EPS because the effect would be
antidilutive.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
----------------------- -----------------------
(In millions except per share data) 1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR
Income from continuing operations $ 28 $ 2 $ 81 $ 26
Preferred stock dividends - (5) - (10)
--------- --------- --------- ---------
Numerator for basic and diluted EPS -
Income (loss) available to common shares $ 28 $ (3) $ 81 $ 16
========= ========= ========= =========
DENOMINATOR
Denominator for basic EPS - Weighted-average
common shares outstanding 76 65 75 65
Common shares issuable upon exercise of stock options 1 - 2 1
--------- --------- --------- ---------
Denominator for diluted EPS - Adjusted weighted-
average shares and assumed conversions 77 65 77 66
========= ========= ========= =========
BASIC EPS FROM CONTINUING OPERATIONS $ .37 $ (.05) $ 1.07 $ .25
========= ========= ========= =========
DILUTED EPS FROM CONTINUING OPERATIONS $ .37 $ (.05) $ 1.05 $ .25
========= ========= ========= =========
10
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
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ASHLAND INC. AND SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENTS
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
----------------------------- -----------------------------
(Dollars in millions except as noted) 1998(1) 1997(2) 1998(1) 1997(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES AND OPERATING REVENUES
Ashland Chemical $ 1,047 $ 952 $ 2,061 $ 1,880
APAC 197 191 535 496
Valvoline 235 257 488 507
Refining and Marketing - 1,638 - 3,415
Arch Coal 299 355 628 700
Intersegment sales
Refining and Marketing - (42) - (94)
Other (6) (5) (13) (13)
----------- ----------- ----------- -----------
$ 1,772 $ 3,346 $ 3,699 $ 6,891
=========== =========== =========== ===========
OPERATING INCOME (3)
Ashland Chemical $ 36 $ 33 $ 90 $ 68
APAC - - 19 19
Valvoline 5 23 16 36
Refining and Marketing (4) 41 (8) 77 8
Inventory valuation adjustments (5) 4 - 4 -
Arch Coal 22 34 50 58
General corporate expenses (14) (13) (30) (28)
----------- ----------- ----------- -----------
$ 94 $ 69 $ 226 $ 161
=========== =========== =========== ===========
OPERATING INFORMATION
(mbpd = thousand barrels per day)
APAC construction backlog
At end of period $ 825 $ 654 $ 825 $ 654
Increase during period $ 174 $ 90 $ 132 $ 7
Valvoline lubricant sales (mbpd) 15.6 15.3 15.6 14.9
Refining and Marketing (6)
Refined products sold (mbpd) 1,142.5
Crude oil refined (mbpd) 905.3
Arch Coal
Tons sold (millions) 11.9 13.9 24.6 27.6
Sales price per ton $ 25.23 $ 25.50 $ 25.46 $ 25.42
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See footnote (1) on Page 2.
(2) Effective October 1, 1997, responsibility for marketing of the
petrochemicals and lube base stocks manufactured by Ashland Petroleum
was transferred from Ashland Chemical and Valvoline to Refining and
Marketing, now MAP. Prior periods have been restated to reflect the
transfer.
(3) Effective October 1, 1997, Ashland adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
As a result, equity income is now included in operating income, with
prior periods restated.
(4) Effective January 1, 1998, includes Ashland's equity income from MAP,
amortization of Ashland's excess investment in MAP, and certain
retained refining and marketing activities.
(5) Represents Ashland's share of inventory adjustments associated with
the formation of MAP and changes in MAP's inventory market valuation
reserve. The reserve reflects the excess of the LIFO cost of MAP's
crude oil and refined product inventories over their net realizable
values.
(6) Amounts represent 100% of the volumes of MAP, which commenced operations
January 1, 1998.
11
- -------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
CURRENT QUARTER - Ashland recorded net income of $28 million for
the quarter ended March 31, 1998, the second quarter of its 1998
fiscal year, which included net income of $2 million from
inventory valuation adjustments related to Marathon Ashland
Petroleum LLC (MAP), the oil refining and marketing joint venture
formed January 1, 1998, between Ashland and Marathon Oil Company.
The quarter's results compare to net income of $7 million for the
quarter ended March 31, 1997. Although last year's second quarter
included net income of $5 million from discontinued operations of
the former Exploration segment, results for this year's second
quarter were enhanced by lower net interest costs resulting from
the use of the proceeds from the sale of the domestic Exploration
operations to reduce debt. The improvement in earnings can be
attributed to increased operating income from Refining and
Marketing and Ashland Chemical, partially offset by declines from
Valvoline and Arch Coal.
YEAR-TO-DATE - Ashland recorded net income of $81 million for the
six months ended March 31, 1998. This amount includes $9 million
in unusual net income, including the March-quarter inventory
valuation adjustments and a December-quarter gain from the sale of
Ashland's 23% interest in Melamine Chemicals. Net income for the
six months ended March 31, 1997, amounted to $43 million. Although
the 1997 period included income from discontinued operations of
$17 million, results for the 1998 period benefited from a $19
million reduction in net interest costs resulting from the use of
the sales proceeds to reduce debt. The improvement in earnings is
primarily the result of an increase in operating income from
Refining and Marketing and Ashland Chemical, partially offset by
declines from Valvoline and Arch Coal.
Results for the periods ended March 31, 1997, have been restated
for a variety of reasons as described in Notes B and C to the
condensed consolidated financial statements on Pages 6 and 7.
These restatements present the results for the prior year's
periods on a basis consistent with the current year's presentation
and all comparisons within this discussion reflect these
restatements.
The formation of MAP on January 1, 1998, resulted in a restatement
of Ashland's results for the quarter ended December 31, 1997, as
described in Note F to the condensed consolidated financial
statements on Page 9. This restatement presents results for both
the quarter and six months ended March 31, 1998, on a consistent
basis. However, since the 1997 periods were not restated,
results for the 1998 and 1997 periods for the Refining and
Marketing segment are not comparable.
ASHLAND CHEMICAL
CURRENT QUARTER - Ashland Chemical reported operating income of
$36 million for the quarter ended March 31, 1998, compared to $33
million for the same period a year ago. Specialty chemicals led
the improvement with a record second-quarter performance. Drew
Industrial, Composite Polymers and Specialty Polymers & Adhesives
all established second-quarter divisional operating income
records, primarily on the strength of increased sales volumes.
Results from distribution and petrochemical businesses were
comparable to those reported in the same quarter last year.
YEAR-TO-DATE - Ashland Chemical reported operating income of $90
million for the six months ended March 31, 1998, compared to $68
million for the first half of fiscal 1997. The current period
includes a pretax gain of $14 million on the sale of Ashland's 23%
interest in Melamine Chemicals. Excluding the
12
<PAGE>
- -------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
ASHLAND CHEMICAL (CONTINUED)
gain, the $8 million improvement in operating income came from the
specialty chemicals and petrochemicals groups. Specialty chemicals
benefited from margin improvements in the Drew Marine and Drew
Industrial divisions. The increase in petrochemicals reflected
better margins for maleic anhydride. Results for the distribution
group were comparable to last year.
APAC
CURRENT QUARTER - For the second quarter of fiscal 1998, APAC's
construction operations reported essentially break-even results.
Similar results were reported for the March 1997 quarter. January
and February 1998 were the wettest months on record for the
Southeast and the rain limited construction activity.
YEAR-TO-DATE - The APAC construction companies reported operating
income of $19 million for the first six months of both fiscal 1998
and 1997. Net revenue (total revenue less subcontract work) was up
9%, while hot mix asphalt production was up 5% and crushed
aggregate production was up 17% for the current year-to-date
period compared to the prior year. The construction backlog at
March 31, 1998, amounted to $825 million (an all-time record) and
represented a 26% improvement over the level of March 1997. If the
weather cooperates, APAC should have an excellent summer
construction season.
In February 1998, APAC completed the acquisition of 10
Missouri-based companies known as the Masters-Jackson group.
Masters-Jackson, which generated revenues of more than $100
million in 1997, strengthens APAC's capabilities in asphalt
production and paving, concrete paving, aggregate production and
bridge-building.
VALVOLINE
CURRENT QUARTER - Valvoline reported operating income of $5
million for the quarter ended March 31, 1998, compared to $23
million for the quarter ended March 31, 1997. The decrease in
earnings was primarily the result of lower R-12 refrigerant sales
volumes and prices. Ample inventory at the distributor and retail
level reduced early season demand for R-12. The current quarter
was also negatively impacted by higher operating expenses related
to the roll-out of new services for First Recovery, Valvoline's
used oil collection unit, and by acquisition costs associated with
the February 1998 acquisition of California-based Eagle One
Industries. With a wide product portfolio that includes waxes,
polishes and cleaners, the Eagle One acquisition fills Valvoline's
need for a premium masterbrand for "above the hood" appearance
applications. The core North American lubricants business
performed well during the quarter, generating operating income
about equal to that recorded in the March 1997 quarter.
YEAR-TO-DATE - Valvoline reported operating income of $16 million
for the six months ended March 31, 1998, compared to $36 million
for the comparable 1997 period. The decrease was generally due to
the same factors discussed in the quarterly comparison.
13
- -------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
REFINING AND MARKETING
CURRENT QUARTER - Operating income from Refining and Marketing
(excluding $4 million in net favorable inventory valuation
adjustments) amounted to $41 million for the quarter ended March
31, 1998, compared to a loss of $8 million for the quarter ended
March 31, 1997. As described previously in this discussion and
discussed further in Note F to the condensed consolidated
financial statements beginning on Page 9, the formation of MAP
effective January 1, 1998, makes operating results between the
current and prior year periods not comparable. Refining and
Marketing operating income for the quarter ended March 31, 1998,
consisted of Ashland's equity income from MAP, amortization of
Ashland's excess investment in MAP, and certain retained refining
and marketing activities. The operating loss reported for the
quarter ended March 31, 1997, represents Ashland's 100% interest
in the businesses contributed to MAP. While the improvement in
operating income resulted principally from more favorable industry
conditions in the March 1998 quarter, a different mix of
operations resulting from the formation of MAP was also a
significant factor in the improvement. In addition, the March 1997
quarter was impacted by heavy flooding in the Ohio Valley which
limited the ability to ship product on the river.
Potential efficiencies derived by MAP have been broadly estimated
to be in excess of $200 million annually on a pretax basis. While
a modest part of these efficiencies are beginning to be realized,
full realization should occur over the next few years as MAP's
integration plans are implemented.
A major maintenance turnaround was completed at the Garyville,
La., refinery in the March 1998 quarter. MAP is implementing a
maintenance and safety improvement program at the Catlettsburg,
Ky., Canton, Ohio, and St. Paul Park, Minn., refineries which will
result in the scheduled shutdown of certain production units at
various times over the next several months. MAP does not expect
product shortages as a result of this downtime. The costs of the
program, as well as the effects of reduced production levels,
could have a negative impact on MAP profitability during the
remainder of calendar 1998, however, such effects are not expected
to be material to Ashland.
YEAR-TO-DATE - Refining and Marketing reported operating income of
$77 million for the six months ended March 31, 1998, excluding $4
million in net favorable inventory valuation adjustments. This
amount represents 100% of the operating income generated in the
quarter ended December 31, 1997, by the businesses Ashland
contributed to MAP, plus the March 1998 quarterly results
described above. For the six months ended March 31, 1997,
Ashland's former refining and marketing businesses generated $8
million in operating income. In addition to the improvement
described in the quarterly comparison above, Ashland's former
businesses reported a $20 million increase in operating income for
the December 1997 quarter, compared to the December 1996 quarter.
This increase was the result of lower average crude oil costs for
the quarter and improved refining margins. In addition, retail
gasoline margins also improved, and sales of gasoline and
merchandise increased.
ARCH COAL
CURRENT QUARTER - Arch Coal reported operating income of $22
million for the quarter ended March 31, 1998, compared to combined
earnings of $34 million from Arch Mineral and Ashland Coal for the
quarter ended March 31, 1997. The decline was due to the
previously announced expiration at the end of calendar 1997 of an
above-market-priced contract with Georgia Power, severe weather
conditions and the January closing of an eastern Kentucky mine.
14
<PAGE>
- -------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
ARCH COAL (CONTINUED)
YEAR-TO-DATE - Arch Coal reported operating income of $50 million
for the six months ended March 31, 1998, compared to combined
earnings of $58 million from Arch Mineral and Ashland Coal for the
six months ended March 31, 1997. Cost savings related to the
merger have made a positive contribution to earnings. However,
sales volumes are down 11% and margins have declined, due in part
to the scheduled expiration of the Georgia Power contract.
In March 1998, Arch Coal announced an agreement to acquire
Atlantic Richfield's (ARCO) domestic coal operations in a
transaction valued at $1.14 billion. See Note D to the condensed
consolidated financial statements on pages 7 and 8 for a
description of this matter.
GENERAL CORPORATE EXPENSES
General corporate expenses amounted to $14 million in the quarter
ended March 31, 1998, compared to $13 million for the quarter
ended March 31, 1997. Year-to-date amounts were $30 million for
the current year versus $28 million for the prior year. The
increases reflect decreased allocations of corporate general and
administrative expenses to Refining and Marketing as a result of
the formation of MAP. This increase was partially offset by a
dividend of $5 million received in the March 1998 quarter from Oil
Insurance Limited, an industry captive insurance company in which
Ashland holds an investment.
INTEREST EXPENSE (NET OF INTEREST INCOME)
For the three months ended March 31, 1998, interest expense (net
of interest income) totaled $40 million, compared to $45 million
for the March 1997 quarter. Year-to-date amounts were $71 million
for the current year versus $90 million for the prior year. The
decline reflected a decrease in interest expense as a result of
Ashland's improved financial position. Ashland used the proceeds
from the July 1997 sale of its domestic exploration and production
operations to significantly reduce its debt levels. However, this
decline was partially offset due to increased debt levels
resulting from $254 million in purchases of leased assets in
December 1997 and January 1998 associated with the formation of
MAP.
DISCONTINUED OPERATIONS
See Note C to the condensed consolidated financial statements on
Page 7 for a discussion of the discontinued operations of the
former Exploration segment.
FINANCIAL POSITION
LIQUIDITY
Ashland's financial position has enabled it to obtain capital for
its financing needs and to maintain investment grade ratings on
its senior debt of Baa2 from Moody's and BBB from Standard &
Poor's. Ashland has a revolving credit agreement providing for up
to $320 million in borrowings, under which no borrowings were
outstanding at March 31, 1998. At that date, Arch Coal also had a
revolving credit agreement providing for up to $500 million in
borrowings, of which $125 million was in use. Under a shelf
registration, Ashland can issue an additional $220 million in
medium-term notes should future
15
<PAGE>
- -------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
FINANCIAL POSITION (CONTINUED)
LIQUIDITY (CONTINUED)
opportunities or needs arise. Ashland and Arch Coal also have
access to various uncommitted lines of credit and commercial paper
markets, under which short-term notes and commercial paper of $253
million were outstanding at March 31, 1998.
Cash flows from continuing operations, a major source of Ashland's
liquidity, amounted to a deficit of $18 million for the six months
ended March 31, 1998, compared to $120 million for the six months
ended March 31, 1997. This decrease was due in part to the change
in accounting to the equity method for Ashland's former Refining
and Marketing operations. This change in accounting effectively
reduces operating cash flows by reclassifying the capital
expenditures for property, plant and equipment for these
operations from investing activities to operating activities.
Property additions for Refining and Marketing amounted to $77
million for the six months ended March 31, 1997. The current
period was also affected by increased working capital requirements
and the payment of income taxes related to the sale of Ashland's
domestic exploration and production operations.
Operating working capital (accounts receivable and inventories,
less trade and other payables) at March 31, 1998, was $494
million, compared to $414 million at September 30, 1997, and $517
million at March 31, 1997. Liquid assets (cash, cash equivalents
and accounts receivable) amounted to 77% of current liabilities at
March 31, 1998, and 88% at September 30, 1997. Ashland's working
capital is affected by its use of the LIFO method of inventory
valuation, which valued inventories $62 million below their
replacement costs at March 31, 1998.
CAPITAL RESOURCES
For the six months ended March 31, 1998, property additions
amounted to $150 million, compared to $186 million for the same
period last year. The prior year includes $77 million for the
businesses contributed to MAP. Property additions and cash
dividends for the remainder of fiscal 1998 are estimated at $270
million and $45 million, respectively. Ashland anticipates meeting
its remaining 1998 capital requirements for property additions,
dividends and $40 million in contractual maturities of long-term
debt from internally generated funds. However, external financing
may be necessary to provide funds for acquisitions. On February
17, 1998, Ashland issued $150 million aggregate principal amount
of 6.625% Senior Notes due 2008. See Note D to the condensed
consolidated financial statements on Pages 7 and 8 for a
description of new credit facilities connected with Arch Coal's
pending acquisition of ARCO's domestic coal operations.
Ashland's capital employed at March 31, 1998, consisted of debt
(46%), minority interest (6%) and common stockholders' equity
(48%). Debt as a percent of capital employed was 46% at March 31,
1998, compared to 43% at September 30, 1997. At March 31, 1998,
long-term debt included about $170 million of floating-rate debt,
and the interest rates on an additional $270 million of fixed-rate
debt had converted to floating rates through interest rate swap
agreements. As a result, interest costs for the remainder of 1998
will fluctuate based on short-term interest rates on about $440
million of Ashland's consolidated long-term debt, as well as on
any short-term notes and commercial paper.
16
<PAGE>
- -------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
ENVIRONMENTAL MATTERS
Federal, state and local laws and regulations relating to the
protection of the environment have resulted in higher operating
costs and capital investments by the industries in which Ashland
operates. Because of the continuing trends toward greater
environmental awareness and increasingly stringent regulations,
Ashland believes that expenditures for environmental compliance
will continue to have a significant effect on its businesses.
Although it cannot accurately predict how such trends will affect
future operations and earnings, Ashland believes the nature and
significance of its ongoing compliance costs will be comparable to
those of its competitors in the chemical, mining and petroleum
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.
During 1997, the U.S. Environmental Protection Agency (EPA)
completed comprehensive inspections of three refineries owned by
Ashland prior to the formation of MAP. See Note E to the condensed
consolidated financial statements on Page 8 for a discussion of
this matter.
Ashland does not believe that any liability resulting from
environmental matters, after taking into consideration its
insurance coverages and amounts already provided for, will have a
material adverse effect on its consolidated financial position,
cash flows or liquidity. However, such matters could have a
material effect on results of operations in a particular quarter
or fiscal year as they develop or as new issues are identified.
YEAR 2000
Ashland began developing plans in 1994 to address the possible
exposures related to the impact of the Year 2000 on its computer
systems, as well as on the products and software it has purchased
from third parties. Most of Ashland's key financial, information
and operational systems have been assessed, and detailed plans
have been developed to address systems modifications or
replacements by December 31, 1999. Ashland is also communicating
with systems providers in an attempt to ensure that purchased
systems will handle the Year 2000 processing implications. Ashland
expects to successfully implement the systems and programming
changes necessary to address Year 2000 issues and believes that
the future costs of such changes (including replacements of
systems solely for Year 2000 concerns) are not expected to exceed
$10 million, which would not be material to Ashland's consolidated
financial position, results of operations or cash flows.
17
<PAGE>
- -------------------------------------------------------------------------------
ASHLAND INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
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. 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 in Note A to the Consolidated
Financial Statements under risks and uncertainties in Ashland's
Annual Report for the fiscal year ended September 30, 1997. 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, 1997, which is on file with the Securities and
Exchange Commission.
The above discussion under "Results of Operations - Refining and
Marketing" contains forward-looking statements with respect to the
amount and timing of efficiencies to be realized by MAP. Some
factors that could potentially cause actual results to differ
materially from present expectations include unanticipated costs
to implement shared technology, difficulties in integrating
corporate structures, delays in leveraging volume procurement
advantages or delays in personnel rationalization. The same
discussion also contains forward-looking statements regarding
maintenance and safety programs which are based on a number of
assumptions, including (among others) the time required to
complete the maintenance and safety programs, costs and downtime
related to these activities, and the effect of reduced production
on profitability. To the extent these assumptions prove
inaccurate, actual results could be materially different than
present expectations.
18
<PAGE>
PART II - OTHER INFORMATION
- ------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings - (1) As of March 31, 1998, Ashland had been
identified 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 in
connection with 80 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 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. However, such
matters could have a material effect on results of operations in a
particular quarter or fiscal year as they develop or as new issues are
identified. Estimated costs for these matters are recognized in accordance
with generally accepted accounting principles governing the likelihood that
costs will be incurred and Ashland's ability to reasonably estimate future
costs. For additional information regarding Superfund, see the
"Miscellaneous - Governmental Regulation and Action-Environmental
Protection" section of Ashland's Form 10-K.
(2) 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 governing emissions of volatile
organic compounds ("VOC") at its Catlettsburg, Kentucky refinery, and
referred the matter to USEPA - Region IV for formal enforcement action. On
May 27, 1997, Kentucky and Ashland entered into an Agreed Order resolving
the issues in contention. Under the terms of the Agreed Order, Ashland
agreed to pay a civil penalty and to design, construct and install
additional VOC controls. Separately, the USEPA issued a Notice of Violation
to Ashland regarding this matter. In connection with the formation of MAP,
the Catlettsburg Refinery was conveyed to Catlettsburg Refinery, LLC, a
subsidiary of MAP. Under the terms of the agreements pursuant to which the
Catlettsburg Refinery was conveyed, Ashland agreed to retain responsibility
for matters arising out of the Agreed Order and Notice of Violation.
(3) In the fall of 1996, the USEPA conducted multimedia inspections of
Ashland's three refineries. Over the past several months, the USEPA and
Ashland have engaged in discussions to resolve the issues identified during
these inspections. The parties have reached a tentative agreement on many
major issues and have begun the process of drafting a settlement document.
Resolution is expected to involve both a penalty payment and environmental
projects. Ashland expects to finalize the settlement agreement in calendar
1998. In connection with the formation of MAP, the refineries were conveyed
to MAP (or a subsidiary of MAP). Under the terms of the agreements
conveying Ashland's three refineries to MAP, Ashland agreed to retain
responsibility for matters arising out of the multimedia inspections.
(4) On October 24, 1996, the rock strata overlaying an abandoned
underground mine adjacent to the coal-refuse impoundment used by an Arch
Coal subsidiary's preparation plant failed, resulting in an accidental
discharge of approximately 6.3 million gallons of water and fine coal
slurry into a tributary of the Powell River in Lee County, Virginia. At the
request of the USEPA and the U.S. Fish & Wildlife Service, the United
States Attorney for the Western District of Virginia has opened a criminal
investigation of the 1996 incident. Arch Coal is cooperating with the
investigation, the results of which are not expected until sometime in
calendar 1998.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule for the quarter ended March 31,
1998
27.2 Restated Financial Data Schedule for the quarter ended
December 31, 1997
(b) Reports on Form 8-K
A report on Form 8-K/A dated January 1, 1998 was filed to file audited
financial statements of Marathon Oil Company downstream businesses and pro
forma financial information to reflect Ashland Inc.'s acquisition of a 38%
interest in Marathon Ashland Petroleum LLC.
A report on Form 8-K dated March 23, 1998 was filed to announce that
Arch Coal, Inc. had executed definitive agreements whereby Arch Coal would
acquire Atlantic Richfield Company's Colorado and Utah coal operations and
simultaneously combine the acquired operations and Arch Coal's Wyoming
operations with ARCO's Wyoming operations in a new joint venture called
Arch Western Resources LLC.
20
<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
21
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
----------- -------------------------------------------------------
27.1 Financial Data Schedule for the quarter ended March 31,
1998
27.2 Restated Financial Data Schedule for the quarter ended
December 31, 1997
<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-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 31
<SECURITIES> 0
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<ALLOWANCES> 20
<INVENTORY> 525
<CURRENT-ASSETS> 1,919
<PP&E> 4,134
<DEPRECIATION> 1,889
<TOTAL-ASSETS> 7,055
<CURRENT-LIABILITIES> 1,518
<BONDS> 1,697
<COMMON> 76
0
0
<OTHER-SE> 1,991
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<SALES> 3,699
<TOTAL-REVENUES> 3,859
<CGS> 3,180
<TOTAL-COSTS> 3,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 155
<INCOME-TAX> 58
<INCOME-CONTINUING> 81
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM ASHLAND INC.'S 1ST QUARTER 1998 10-Q
WHICH WAS RESTATED IN THE 2ND QUARTER 1998 10-Q, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-Q'S AND NOTE F OF NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS IN THE 2ND QUARTER 10-Q THAT
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<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 57
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<ALLOWANCES> 19
<INVENTORY> 500
<CURRENT-ASSETS> 1,901
<PP&E> 4,087
<DEPRECIATION> 1,857
<TOTAL-ASSETS> 6,788
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0
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<OTHER-SE> 1,981
<TOTAL-LIABILITY-AND-EQUITY> 6,788
<SALES> 1,927
<TOTAL-REVENUES> 2,005
<CGS> 1,652
<TOTAL-COSTS> 1,652
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 101
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</TABLE>
