form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark One)
|
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended June
30, 2008
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _________ to ___________
Commission
file number 1-32532
ASHLAND INC.
(a
Kentucky corporation)
I.R.S.
No. 20-0865835
50 E.
RiverCenter Boulevard
P.O. Box
391
Covington,
Kentucky 41012-0391
Telephone
Number (859) 815-3333
Indicate by check
mark whether the Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No
o
Indicate by check mark
whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
One):
Large
Accelerated Filer þ |
Accelerated
Filer o |
Non-Accelerated
Filer o |
Smaller Reporting
Company o |
(Do not check
if a smaller reporting company.) |
Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No
þ
At June 30, 2008, there were 63,005,458
shares of Registrant’s Common Stock outstanding.
PART
I - FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS
OF CONSOLIDATED INCOME
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
June
30
|
|
|
June
30
|
|
(In
millions except per share data - unaudited)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
AND OPERATING REVENUES
|
|
$ |
2,201 |
|
|
$ |
1,983 |
|
|
$ |
6,166 |
|
|
$ |
5,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
|
1,844 |
|
|
|
1,643 |
|
|
|
5,158 |
|
|
|
4,707 |
|
Selling, general and
administrative expenses (a)
|
|
|
283 |
|
|
|
259 |
|
|
|
856 |
|
|
|
834 |
|
|
|
|
2,127 |
|
|
|
1,902 |
|
|
|
6,014 |
|
|
|
5,541 |
|
EQUITY
AND OTHER INCOME
|
|
|
13 |
|
|
|
10 |
|
|
|
33 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
87 |
|
|
|
91 |
|
|
|
185 |
|
|
|
190 |
|
Gain (loss) on the MAP
Transaction (b)
|
|
|
1 |
|
|
|
1 |
|
|
|
23 |
|
|
|
(3 |
) |
Net
interest and other financing income
|
|
|
5 |
|
|
|
9 |
|
|
|
26 |
|
|
|
34 |
|
INCOME
FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEFORE
INCOME TAXES
|
|
|
93 |
|
|
|
101 |
|
|
|
234 |
|
|
|
221 |
|
Income
taxes - Note I
|
|
|
27 |
|
|
|
15 |
|
|
|
58 |
|
|
|
52 |
|
INCOME
FROM CONTINUING OPERATIONS
|
|
|
66 |
|
|
|
86 |
|
|
|
176 |
|
|
|
169 |
|
Income from discontinued
operations (net of income taxes) - Note D (c)
|
|
|
6 |
|
|
|
14 |
|
|
|
1 |
|
|
|
29 |
|
NET
INCOME
|
|
$ |
72 |
|
|
$ |
100 |
|
|
$ |
177 |
|
|
$ |
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE
- Note J
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
1.04 |
|
|
$ |
1.37 |
|
|
$ |
2.80 |
|
|
$ |
2.68 |
|
Income
from discontinued operations
|
|
|
.11 |
|
|
|
.23 |
|
|
|
.01 |
|
|
|
.46 |
|
Net
income
|
|
$ |
1.15 |
|
|
$ |
1.60 |
|
|
$ |
2.81 |
|
|
$ |
3.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE
- Note J
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
1.03 |
|
|
$ |
1.35 |
|
|
$ |
2.77 |
|
|
$ |
2.64 |
|
Income
from discontinued operations
|
|
|
.10 |
|
|
|
.23 |
|
|
|
.01 |
|
|
|
.45 |
|
Net
income
|
|
$ |
1.13 |
|
|
$ |
1.58 |
|
|
$ |
2.78 |
|
|
$ |
3.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PAID PER COMMON SHARE
|
|
$ |
.275 |
|
|
$ |
.275 |
|
|
$ |
.825 |
|
|
$ |
.825 |
|
(a)
|
The
nine months ended June 30, 2007 includes a $25 million charge for costs
associated with Ashland’s voluntary severance offer. See Note E
of the Notes to Condensed Consolidated Financial Statements for further
information.
|
(b)
|
“MAP
Transaction” refers to the June 30, 2005 transfer of Ashland’s 38%
interest in Marathon Ashland Petroleum LLC (MAP) and two other businesses
to Marathon Oil Corporation. The income for the nine months
ended June 30, 2008 is primarily due to a $23 million gain associated with
a tax settlement agreement entered into with Marathon Oil
Corporation. For further information on this tax settlement
agreement see Note E of the Notes to Condensed Consolidated Financial
Statements. The gain (loss) in the current quarter and prior
periods presented reflects adjustments in the recorded receivable for
future estimated tax deductions related primarily to environmental and
other postretirement obligations.
|
(c)
|
The
three and nine months ended June 30, 2008 and the three and nine months
ended June 30, 2007 include after-tax income of $7 million,
$7 million, $16 million and $34 million, respectively, from an
increase in Ashland’s asbestos-related litigation reserves and
expenses. For further information on discontinued operations
see Note D of the Notes to Condensed Consolidated Financial
Statements.
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
|
|
|
|
|
|
|
|
|
|
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
September
30
|
|
June
30
|
(In
millions - unaudited)
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
853 |
|
|
$ |
897 |
|
|
$ |
848 |
|
Available-for-sale
securities - Note C
|
|
|
- |
|
|
|
155 |
|
|
|
141 |
|
Accounts
receivable
|
|
|
1,591 |
|
|
|
1,508 |
|
|
|
1,507 |
|
Allowance
for doubtful accounts
|
|
|
(43 |
) |
|
|
(41 |
) |
|
|
(41 |
) |
Inventories
- Note G
|
|
|
538 |
|
|
|
610 |
|
|
|
587 |
|
Deferred
income taxes
|
|
|
75 |
|
|
|
69 |
|
|
|
78 |
|
Other
current assets
|
|
|
86 |
|
|
|
78 |
|
|
|
72 |
|
|
|
|
3,100 |
|
|
|
3,276 |
|
|
|
3,192 |
|
INVESTMENTS
AND OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
rate securities - Note C
|
|
|
267 |
|
|
|
- |
|
|
|
- |
|
Goodwill
and other intangibles - Note H
|
|
|
422 |
|
|
|
377 |
|
|
|
373 |
|
Asbestos
insurance receivable (noncurrent portion) - Note N
|
|
|
438 |
|
|
|
458 |
|
|
|
460 |
|
Deferred
income taxes
|
|
|
132 |
|
|
|
157 |
|
|
|
181 |
|
Other
noncurrent assets
|
|
|
403 |
|
|
|
435 |
|
|
|
437 |
|
|
|
|
1,662 |
|
|
|
1,427 |
|
|
|
1,451 |
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
2,270 |
|
|
|
2,125 |
|
|
|
2,074 |
|
Accumulated
depreciation and amortization
|
|
|
(1,188 |
) |
|
|
(1,142 |
) |
|
|
(1,105 |
) |
|
|
|
1,082 |
|
|
|
983 |
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,844 |
|
|
$ |
5,686 |
|
|
$ |
5,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
20 |
|
|
$ |
5 |
|
|
$ |
5 |
|
Trade
and other payables
|
|
|
1,184 |
|
|
|
1,141 |
|
|
|
1,138 |
|
Income
taxes
|
|
|
- |
|
|
|
6 |
|
|
|
4 |
|
|
|
|
1,204 |
|
|
|
1,152 |
|
|
|
1,147 |
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (less current portion)
|
|
|
45 |
|
|
|
64 |
|
|
|
65 |
|
Employee
benefit obligations - Note K
|
|
|
262 |
|
|
|
255 |
|
|
|
294 |
|
Asbestos
litigation reserve (noncurrent portion) - Note N
|
|
|
530 |
|
|
|
560 |
|
|
|
567 |
|
Other
noncurrent liabilities and deferred credits
|
|
|
445 |
|
|
|
501 |
|
|
|
501 |
|
|
|
|
1,282 |
|
|
|
1,380 |
|
|
|
1,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
3,358 |
|
|
|
3,154 |
|
|
|
3,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,844 |
|
|
$ |
5,686 |
|
|
$ |
5,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS
OF CONSOLIDATED STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
|
(In
millions - unaudited)
|
|
stock
|
|
|
capital
|
|
|
earnings
|
|
|
income
(loss)
|
(a)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT SEPTEMBER 30, 2006
|
|
$ |
1 |
|
|
$ |
240 |
|
|
$ |
2,899 |
|
|
$ |
(44 |
) |
|
$ |
3,096 |
|
|
Total comprehensive income
(b)
|
|
|
|
|
|
|
|
|
|
|
198 |
|
|
|
45 |
|
|
|
243 |
|
|
Cash
dividends, $.825 per common share
|
|
|
|
|
|
|
(1 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
(52 |
) |
|
Issued
669,318 common shares under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock incentive and
other plans (c)
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
Repurchase
of 4,712,000 common shares
|
|
|
|
|
|
|
(267 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
(288 |
) |
BALANCE
AT JUNE 30, 2007
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
3,025 |
|
|
$ |
1 |
|
|
$ |
3,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT SEPTEMBER 30, 2007
|
|
$ |
1 |
|
|
$ |
16 |
|
|
$ |
3,040 |
|
|
$ |
97 |
|
|
$ |
3,154 |
|
|
Total comprehensive income
(b)
|
|
|
|
|
|
|
|
|
|
|
177 |
|
|
|
71 |
|
|
|
248 |
|
|
Cash
dividends, $.825 per common share
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
(52 |
) |
|
Issued
131,453 common shares under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock incentive and
other plans (c)
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
BALANCE
AT JUNE 30, 2008
|
|
$ |
1 |
|
|
$ |
24 |
|
|
$ |
3,165 |
|
|
$ |
168 |
|
|
$ |
3,358 |
|
(a)
|
At
June 30, 2008 and 2007, the accumulated other comprehensive income
(after-tax) of $168 million for 2008 and $1 million for 2007 was
comprised of pension and postretirement obligations of $55 million for
2008 and a minimum pension liability of $113 million for 2007, net
unrealized translation gains of $228 million for 2008 and $115 million for
2007, net unrealized losses on available-for-sale securities of
$5 million for 2008, and net unrealized losses on cash flow hedges of
$1 million for 2007.
|
(b)
|
Reconciliations
of net income to total comprehensive income
follow.
|
|
|
|
Three
months ended June 30
|
|
|
Nine
months ended June 30
|
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
72 |
|
|
$ |
100 |
|
|
$ |
177 |
|
|
$ |
198 |
|
|
Unrealized
translation gains
|
|
|
4 |
|
|
|
30 |
|
|
|
76 |
|
|
|
43 |
|
|
Related
tax benefit
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
Net
unrealized gains on cash flow hedges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
Net
unrealized losses on available-for-sale securities
|
|
|
(2 |
) |
|
|
- |
|
|
|
(8 |
) |
|
|
- |
|
|
Related
tax benefit
|
|
|
1 |
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
Total
comprehensive income
|
|
$ |
75 |
|
|
$ |
130 |
|
|
$ |
248 |
|
|
$ |
243 |
|
|
|
(c)
|
Includes
income tax benefits resulting from the exercise of stock options of $2
million and $11 million for the nine months ended June 30, 2008 and 2007,
respectively.
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
|
|
|
|
|
|
|
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
|
|
|
|
|
|
|
STATEMENTS
OF CONDENSED CONSOLIDATED CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended
|
|
|
|
June
30
|
|
(In
millions - unaudited)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
Net
income
|
|
$ |
177 |
|
|
$ |
198 |
|
Income
from discontinued operations (net of income taxes)
|
|
|
(1 |
) |
|
|
(29 |
) |
Adjustments to reconcile income from continuing operations to cash flows
from operating activities
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
105 |
|
|
|
83 |
|
Deferred
income taxes
|
|
|
20 |
|
|
|
15 |
|
Equity
income from affiliates
|
|
|
(17 |
) |
|
|
(12 |
) |
Distributions
from equity affiliates
|
|
|
7 |
|
|
|
8 |
|
(Gain)
loss on the MAP Transaction
|
|
|
(23 |
) |
|
|
3 |
|
Change in operating assets and
liabilities (a)
|
|
|
66 |
|
|
|
(258 |
) |
|
|
|
334 |
|
|
|
8 |
|
CASH
FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
3 |
|
|
|
17 |
|
Excess
tax benefits related to share-based payments
|
|
|
1 |
|
|
|
8 |
|
Repayment
of long-term debt
|
|
|
(4 |
) |
|
|
(12 |
) |
Repurchase
of common stock
|
|
|
- |
|
|
|
(288 |
) |
Cash
dividends paid
|
|
|
(52 |
) |
|
|
(726 |
) |
|
|
|
(52 |
) |
|
|
(1,001 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(118 |
) |
|
|
(102 |
) |
Purchase
of operations - net of cash acquired
|
|
|
(128 |
) |
|
|
(73 |
) |
Proceeds
from sale of operations
|
|
|
35 |
|
|
|
1 |
|
Purchases
of available-for-sale securities
|
|
|
(435 |
) |
|
|
(357 |
) |
Proceeds
from sales and maturities of available-for-sale securities
|
|
|
314 |
|
|
|
566 |
|
Other
items
|
|
|
8 |
|
|
|
20 |
|
|
|
|
(324 |
) |
|
|
55 |
|
CASH
USED BY CONTINUING OPERATIONS
|
|
|
(42 |
) |
|
|
(938 |
) |
Cash
used by discontinued operations
|
|
|
|
|
|
|
|
|
Operating
cash flows
|
|
|
(2 |
) |
|
|
(5 |
) |
Investing
cash flows
|
|
|
- |
|
|
|
(29 |
) |
DECREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
(44 |
) |
|
|
(972 |
) |
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
897 |
|
|
|
1,820 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$ |
853 |
|
|
$ |
848 |
|
(a) |
Excludes changes
resulting from operations acquired or
sold. |
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A – BASIS OF PRESENTATION
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. In the opinion of management all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These condensed consolidated financial statements
should be read in conjunction with Ashland’s Annual Report on Form 10-K for
the fiscal year ended September 30, 2007. Results of operations for
the period ended June 30, 2008, are not necessarily indicative of results
to be expected for the year ending September 30, 2008. Certain
prior period data has been reclassified in the condensed consolidated financial
statements and accompanying footnotes to conform to current period
presentation. Equity and other income, which previously had been
classified within the revenue caption of the Statements of Consolidated Income,
has been combined and reclassified as a separate caption above operating income
within this financial statement.
The
preparation of Ashland’s condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and the disclosures of contingent
assets and liabilities. Significant items that are subject to such
estimates and assumptions include, but are not limited to, long-lived assets,
employee benefit obligations, income taxes, reserves and associated receivables
for asbestos litigation and environmental remediation. Although
management bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, actual
results could differ significantly from the estimates under different
assumptions or conditions.
NOTE
B – NEW ACCOUNTING STANDARDS
In
June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(FIN 48). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with Financial Accounting Standard No. 109 (FAS 109), “Accounting for
Income Taxes.” FIN 48 prescribes a recognition threshold and
measurement attributes for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. Ashland adopted the provisions of
FIN 48 effective October 1, 2007. The cumulative effect of
adoption of FIN 48 resulted in a reduction to the October 1, 2007 opening
retained earnings balance of less than $1 million. For additional
information on the adoption and implementation of this Interpretation see
Note I.
In
September 2006, the FASB issued Financial Accounting Standard (FAS) No. 157
(FAS 157), “Fair Value Measurements,” which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements since the FASB has
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. FAS 157 becomes effective for Ashland
on October 1, 2008. Ashland is currently in the process of
determining the effect, if any, the adoption of FAS 157 will have on the
condensed consolidated financial statements.
In
December 2007, the FASB’s Emerging Issues Task Force (EITF) issued new guidance
for entities that enter into collaborative arrangements in Issue 07-1 (EITF
07-1), “Accounting for Collaborative Arrangement.” EITF 07-1 defines
a collaborative arrangement and establishes presentation and disclosure
requirements for transactions among participants in a collaborative arrangement
and between participants in the arrangement and third parties. EITF
07-1 defines a collaborative arrangement as a contractual arrangement that
involves two or more parties that both: (a) actively participate in a
joint operating activity and (b) are exposed to significant risks and rewards
that depend on the commercial success of the joint operating
activity. EITF 07-1 becomes effective for Ashland on October 1,
2009. Ashland is currently in
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
B – NEW ACCOUNTING STANDARDS (continued)
the
process of determining the effect, if any, the adoption of EITF 07-1 will have
on the notes to the condensed consolidated financial statements.
In March
2008, the FASB issued FAS No. 161 (FAS 161), “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No. 133
Accounting for Derivative Instruments and Hedging Activities.” FAS
161 requires enhanced disclosures for derivative and hedging activities by
providing qualitative information about the objectives and strategies for using
derivatives, quantitative data about the fair value of the gains and losses on
derivative contracts, and details of credit risk related to contingent features
of hedged positions. This Statement also requires Ashland to disclose
more information about the location and amounts of derivative instruments in the
condensed consolidated financial statements and how derivatives and related
hedges are accounted for under FAS 133. FAS 161 becomes effective for
Ashland on January 1, 2009. Ashland is currently in the process of
determining the effect, if any, the adoption of FAS 161 will have on the
condensed consolidated financial statements.
In April
2008, the FASB issued Staff Position No. FAS 142-3 (FSP 142-3), “Determination
of the Useful Life of Intangible Assets,” which amends the list of factors an
entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FAS
No. 142 (FAS 142), “Goodwill and Other Intangible Assets.” The
new guidance applies to (1) intangible assets that are acquired individually or
with a group of other assets and (2) intangible assets acquired in both business
combinations and asset acquisitions. FSP 142-3 becomes effective for
Ashland on October 1, 2009. Ashland is currently in the process of
determining the effect, if any, the adoption of FSP 142-3 will have on the
condensed consolidated financial statements.
NOTE
C – INVESTMENT SECURITIES
Investment
securities are classified as held-to-maturity or available-for-sale on the date
of purchase in accordance with FAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities.” Ashland did not have any securities
classified as held-to-maturity as of June 30, 2008, September 30, 2007 or June
30, 2007. Available-for-sale securities are reported at fair value
with unrealized gains and losses, net of related deferred income taxes, included
in accumulated other comprehensive income (loss), a component of stockholders’
equity.
At June
30, 2008, Ashland held at par value $275 million of student loan
auction rate securities for which there was not an active market. As a
result of liquidity concerns within the current auction rate securities market
affecting the securities’ fair value, Ashland recorded, as a component of
stockholders’ equity, a temporary $8 million unrealized loss on the
portfolio. In February 2008, the auction rate securities market
became largely illiquid, as there was not enough demand to purchase all of the
securities that holders desired to sell at par value during certain
auctions. Since February 2008, the market for auction rate securities
has failed to achieve equilibrium and, as a result, Ashland determined that a
temporary adjustment to the par value of these high quality instruments was
required until the liquidity of the market returns. Ashland’s current
estimate of fair value for auction rate securities is based on an internal
discounted cash flow model, given the current lack of observable market
information. The assumptions within the model include credit quality,
liquidity, estimates on the probability of the issue being called prior to final
maturity, and the impact due to extended periods of maximum auction
rates.
At June
30, 2008, available-for-sale securities totaled $267 million and were classified
as long-term. Previously, available-for-sale securities of $155
million and $141 million at September 30, 2007 and June 30, 2007,
respectively, were classified as short-term. Due to the current
uncertainty as to when active trading will resume in the auction rate securities
market, Ashland believes the recovery period for certain of these securities may
extend over a twelve-month period. As a result, Ashland has
classified these instruments as long-term auction rate securities at June 30,
2008 in Ashland’s Condensed Consolidated Balance Sheet.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
D – DISCONTINUED OPERATIONS
On August
28, 2006, Ashland completed the sale of the stock of its wholly owned
subsidiary, Ashland Paving And Construction, Inc. (APAC) to Oldcastle Materials,
Inc. (Oldcastle) for $1.3 billion. The operating results and
assets and liabilities related to APAC have been previously reflected as
discontinued operations in the condensed consolidated financial
statements. Ashland has made adjustments to the gain on the sale
of APAC, relating to the tax effects of the sale, during the nine months ended
June 30, 2008 and 2007. Such adjustments may continue to occur in
future periods. Adjustments to the gain are reflected in the period
they are determined and recorded in the discontinued operations caption in the
Statements of Consolidated Income.
Ashland
is subject to liabilities from claims alleging personal injury caused by
exposure to asbestos. Such claims result primarily from
indemnification obligations undertaken in 1990 in connection with the sale of
Riley Stoker Corporation (Riley), a former subsidiary. During the
three and nine month periods ended June 30, 2008 and 2007, Ashland recorded
income from asbestos-related items, primarily due to an increase in the
insurance receivable, some of which in the prior nine month period reflected
improved credit quality. See Note N for further discussion of
Ashland’s asbestos-related activity.
Components
of amounts in the Statements of Consolidated Income related to discontinued
operations are presented in the following table for the three and nine months
ended June 30, 2008 and 2007.
|
|
Three
months ended |
|
|
Nine
months ended |
|
|
June
30
|
|
|
June
30
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Income
from discontinued operations (net of income taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos-related
litigation reserves and expenses
|
|
$ |
7 |
|
|
$ |
16 |
|
|
$ |
7 |
|
|
$ |
34 |
|
Loss
on disposal of discontinued operations (net of income
taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
Electronic
Chemicals |
|
|
- |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
NOTE
E – ACQUISITIONS AND DIVESTITURES
Acquisitions
In
December 2006, Ashland Specialty Polymers and Adhesives, a business unit of
Performance Materials, acquired Northwest Coatings of Oak Creek, Wisconsin, a
formulator and manufacturer of adhesives and coatings employing ultraviolet and
electron beam (UV/EB) polymerization technologies from Caltius Equity
Partners. The transaction, which included production facilities in
Milwaukee, Wisconsin and Greensboro, North Carolina, was valued at $74
million. At the time this purchase transaction was announced,
Northwest Coatings had trailing twelve month sales of approximately
$40 million.
On June
30, 2008, Ashland acquired the assets of the pressure-sensitive adhesive
business and atmospheric emulsions business of Air Products and Chemicals,
Inc. The $92 million transaction included manufacturing
facilities in Elkton, Maryland and Piedmont, South Carolina. The
purchased operations, which merged into Performance Materials, had sales of $126
million in calendar year 2007, principally in North America.
In June
2008, Ashland and Süd-Chemie AG signed a nonbinding memorandum of
understanding to form a new, global joint venture to serve the foundries and
metal casting industry. Under the terms of the memorandum, each
parent company would hold a 50-percent share of the joint venture, which is
planned to be headquartered in Venlo, The Netherlands. Assets and
employees would transfer to the new joint venture upon closing, anticipated by
early calendar year 2009. The transaction is dependent upon the
successful
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
E – ACQUISITIONS AND DIVESTITURES (continued)
negotiation
of definitive agreements, and closing will depend upon satisfactory completion
of a number of standard closing conditions, including regulatory
review. The new enterprise would combine three
businesses: Ashland’s Casting Solutions, a business unit of
Performance Materials, the foundry-related businesses of Süd-Chemie, and
Ashland-Südchemie-Kernfest GmbH (ASK), which currently operates as a joint
venture. The businesses to be contributed to the joint venture
generated combined revenues of approximately $1.1 billion for the calendar
year 2007 and had approximately 1,300 employees on a combined
basis.
Divestitures
On August
28, 2006, Ashland completed the sale of the stock of its wholly owned
subsidiary, APAC, to Oldcastle. The operating results and assets and
liabilities related to APAC have been previously reflected as discontinued
operations in the condensed consolidated financial statements. For
further information on this transaction see Note D.
As a
result of the APAC divestiture in August 2006, it was determined that certain
identified corporate costs that had been previously allocated to this business
needed to be eliminated to maintain Ashland’s overall
competitiveness. As a means to eliminate these costs, Ashland offered
an enhanced early retirement or voluntary severance opportunity to
administrative and corporate employees during fiscal year 2007. In
total, Ashland accepted voluntary severance offers from 172 employees under the
program. As a result, a $25 million pretax charge was recorded
for severance, pension and other postretirement benefit costs during the March
2007 quarter. This cost was classified in the selling, general and
administrative expense caption of the Statements of Consolidated Income and
grouped within “Unallocated and other” for segment presentation
purposes. The termination dates for employees participating in the program
were completed and all amounts paid by the end of the March 2008
quarter.
On June
30, 2005, Ashland completed the transfer of its 38% interest in Marathon Ashland
Petroleum LLC (MAP) and two other businesses to Marathon Oil Corporation
(Marathon) in a transaction valued at approximately $3.7 billion (the MAP
Transaction). The MAP Transaction was structured to be generally
non-taxable to Ashland. Pursuant to a Tax Matters Agreement between
Ashland and Marathon related to the MAP Transaction, Marathon obtained tax
deductions for certain of Ashland’s federal and state tax attributes which arose
prior to June 30, 2005 and has agreed to compensate Ashland for the tax benefit
of these items. During the March 2008 quarter, Ashland and Marathon
agreed to a tax related settlement with respect to four specific tax attributes
and deductions subject to the terms of this Tax Matters
Agreement. These tax attributes and deductions were originally
scheduled to be reimbursed periodically at much later points in the future, some
with the potential of greater than 20 or more years. The effect of
this settlement accelerated Marathon’s reimbursement to Ashland for certain of
these deductions, resulting in the receipt of $26 million in cash from Marathon
representing the present value of the future deductions. As a result,
Ashland recognized a gain on the MAP Transaction of $23 million during the March
2008 quarter.
NOTE
F – DEBT
In April
2007, Ashland replaced its revolving credit agreement with a new five year
revolving credit facility which provides for up to $300 million in
borrowings. Up to an additional $100 million in borrowings is
available with the consent of one or more of the lenders. The
borrowing capacity under this new facility was reduced by $101 million for
letters of credit outstanding under the credit agreement at June 30,
2008. The revolving credit agreement contains a covenant limiting the
total debt Ashland may incur from all sources as a function of Ashland’s
stockholders’ equity. The covenant’s terms would have permitted
Ashland to borrow $4.9 billion at June 30, 2008, in addition to the actual total
debt incurred at that time. Permissible total Ashland debt under the
covenant’s terms increases (or decreases) by 150% for any increase (or decrease)
in stockholders’ equity.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
F – DEBT (continued)
In the
past Ashland entered into in-substance defeasance investments of
approximately $57 million to repay current and long-term debt that had a
carrying value of $49 million on the Condensed Consolidated Balance
Sheet. Because the transactions were not a legal defeasance, the
investments have been placed into a trust that is exclusively restricted to
future obligations and repayments related to these debt
instruments. The investments have been classified on the Condensed
Consolidated Balance Sheet as other current assets or other noncurrent assets
based on the contractual debt repayment schedule. At June 30, 2008,
September 30, 2007 and June 30, 2007, the carrying value of the investments
to defease debt was $35 million, $40 million and $39 million,
respectively. The carrying value of the debt was $31 million,
$34 million and $34 million as of June 30, 2008, September 30, 2007
and June 30, 2007, respectively.
NOTE
G – INVENTORIES
Inventories
are carried at the lower of cost or market. Certain chemicals,
plastics and lubricants are valued at cost using the last-in, first-out (LIFO)
method. The remaining inventories are stated at cost using the
first-in, first-out (FIFO) method or average cost method (which approximates
FIFO). The following table summarizes Ashland’s inventories as of the
reported Condensed Consolidated Balance Sheet dates.
|
|
June
30
|
|
|
September
30
|
|
|
June
30
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Chemicals
and plastics
|
|
$ |
572 |
|
|
$ |
625 |
|
|
$ |
593 |
|
Lubricants
|
|
|
99 |
|
|
|
86 |
|
|
|
92 |
|
Other
products and supplies
|
|
|
52 |
|
|
|
54 |
|
|
|
55 |
|
Excess
of replacement costs over LIFO carrying values
|
|
|
(185 |
) |
|
|
(155 |
) |
|
|
(153 |
) |
|
|
$ |
538 |
|
|
$ |
610 |
|
|
$ |
587 |
|
NOTE
H – GOODWILL AND OTHER INTANGIBLES
In
accordance with FAS 142 Ashland conducts an annual review for
impairment. Impairment is to be examined more frequently if certain
indicators are encountered. In accordance with FAS 142, Ashland
reviewed goodwill for impairment based on reporting units, which are defined as
operating segments or groupings of businesses one level below the operating
segment level. Ashland has completed its most recent annual goodwill
impairment test required by FAS 142 as of July 1, 2007 and has
determined that no impairment exists. The following is a progression
of goodwill by segment for the nine months ended June 30, 2008 and
2007.
|
|
Performance
|
|
|
|
|
|
|
|
|
Water
|
|
|
|
|
(In
millions) |
|
|
Materials |
|
|
|
Distribution |
|
|
|
Valvoline |
|
|
|
Technologies |
|
|
|
Total |
|
Balance
at September 30, 2007
|
|
$ |
166 |
|
|
$ |
1 |
|
|
$ |
30 |
|
|
$ |
71 |
|
|
$ |
268 |
|
Acquisitions
|
|
|
28 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
29 |
|
Currency
translation adjustment
|
|
|
8 |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
|
|
11 |
|
Balance
at June 30, 2008
|
|
$ |
202 |
|
|
$ |
1 |
|
|
$ |
30 |
|
|
$ |
75 |
|
|
$ |
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance |
|
|
|
|
|
|
|
|
|
|
|
Water |
|
|
|
|
|
(In
millions) |
|
|
Materials |
|
|
|
Distribution |
|
|
|
Valvoline |
|
|
|
Technologies |
|
|
|
Total |
|
Balance
at September 30, 2006
|
|
$ |
110 |
|
|
$ |
1 |
|
|
$ |
29 |
|
|
$ |
70 |
|
|
$ |
210 |
|
Acquisitions
|
|
|
47 |
|
|
|
- |
|
|
|
1 |
|
|
|
(2 |
) |
|
|
46 |
|
Currency
translation adjustment
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
5 |
|
Balance
at June 30, 2007
|
|
$ |
160 |
|
|
$ |
1 |
|
|
$ |
30 |
|
|
$ |
70 |
|
|
$ |
261 |
|
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
H – GOODWILL AND OTHER INTANGIBLES (continued)
Intangible
assets consist of trademarks and trade names, patents and licenses, non-compete
agreements, sale contracts, customer lists and intellectual
property. Intangibles are amortized on a straight-line basis over
their estimated useful lives. The cost of trademarks and trade names
is amortized principally over 10 to 25 years, intellectual property over 5 to 17
years and other intangibles over 3 to 30 years. Ashland reviews
intangible assets for possible impairment whenever events or changes in
circumstances indicate that carrying amounts may not be
recoverable.
Intangible
assets were comprised of the following as of June 30, 2008 and
2007.
|
|
2008
|
|
2007
|
|
|
|
Gross |
|
|
|
|
|
|
|
Net |
|
|
|
Gross |
|
|
|
|
|
|
|
Net |
|
|
|
|
carrying |
|
|
|
Accumulated |
|
|
|
carrying |
|
|
|
carrying |
|
|
|
Accumulated |
|
|
|
carrying |
|
(In
millions) |
|
|
amount |
|
|
|
amortization |
|
|
|
amount |
|
|
|
amount |
|
|
|
amortization |
|
|
|
amount |
|
Trademarks
and trade names
|
|
$ |
66 |
|
|
$ |
(21 |
) |
|
$ |
45 |
|
|
$ |
65 |
|
|
$ |
(21 |
) |
|
$ |
44 |
|
Intellectual
property
|
|
|
54 |
|
|
|
(20 |
) |
|
|
34 |
|
|
|
48 |
|
|
|
(16 |
) |
|
|
32 |
|
Other
intangibles
|
|
|
51 |
|
|
|
(16 |
) |
|
|
35 |
|
|
|
49 |
|
|
|
(13 |
) |
|
|
36 |
|
Total
intangible assets
|
|
$ |
171 |
|
|
$ |
(57 |
) |
|
$ |
114 |
|
|
$ |
162 |
|
|
$ |
(50 |
) |
|
$ |
112 |
|
Amortization
expense recognized on intangible assets for the nine months ended June 30 was
$8 million for 2008 and $8 million for 2007. As of June 30,
2008, all of Ashland’s intangible assets that had a carrying value were being
amortized except for certain trademarks and trade names that currently have been
determined to have indefinite lives. These assets had a balance of
$32 million as of June 30, 2008 and 2007. In accordance with
FAS 142, Ashland annually reviews these assets to determine whether events
and circumstances continue to support the indefinite useful
life. Estimated amortization expense for future periods is
$11 million in 2008 (includes nine months actual and three months
estimated), $12 million in 2009, $8 million in 2010, $7 million
in 2011 and $6 million in 2012.
NOTE I
– INCOME TAXES
Ashland
adopted the provisions of FIN 48 as of October 1, 2007. The
cumulative effect of adoption of FIN 48 resulted in a reduction to the
October 1, 2007 opening retained earnings balance of less than
$1 million. FIN 48 prescribes a recognition threshold and
measurement attribute for the accounting and financial statement disclosure of
tax positions taken or expected to be taken in a tax return. The
evaluation of a tax position is a two-step process. The first step
requires Ashland to determine whether it is more likely than not that a tax
position will be sustained upon examination based on the technical merits of the
position. The second step requires Ashland to recognize in the
financial statements each tax position that meets the more likely than not
criteria, measured at the largest amount of benefit that has a greater than
fifty percent likelihood of being realized. As of October 1, 2007,
the amount of unrecognized tax benefits was $57 million, of which $30
million related to discontinued operations. The total amount of
unrecognized tax benefits that, if recognized, would affect the effective tax
rate for continuing and discontinued operations was $25 million and
$18 million, respectively. The remaining unrecognized tax
benefits relate to tax positions for which ultimate deductibility is highly
certain but for which there is uncertainty as to the timing of such
deductibility. Recognition of these tax benefits would not have an
impact on the effective tax rate.
Ashland
recognizes interest and penalties related to unrecognized tax benefits as a
component of income tax expense in the Statements of Consolidated
Income. Ashland had approximately $15 million in interest and
penalties related to unrecognized tax benefits accrued as of October 1,
2007.
During
the nine month period ended June 30, 2008, Ashland decreased its liability for
unrecognized tax benefits for continuing operations by $1 million and increased
its liability for unrecognized tax benefits for discontinued operations by $4
million. It is reasonably possible that the amount of the
unrecognized tax
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE I
– INCOME TAXES (continued)
benefits
may increase or decrease within the next twelve months as the result of
settlement of ongoing audits. However, Ashland does not presently
anticipate that any increase or decrease in unrecognized tax benefits will be
material to the condensed consolidated financial statements.
Ashland
or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. Foreign
taxing jurisdictions significant to Ashland include Australia, Canada and the
Netherlands. Ashland is subject to U.S. federal and state income tax
examinations by tax authorities for periods after July 1, 2005. With
respect to countries outside of the United States, with certain exceptions,
Ashland’s foreign subsidiaries are subject to income tax audits for years after
1999. As a result of favorable developments in a certain foreign tax
litigation case, Ashland reduced its reserves associated with this liability and
recorded a $10 million gain during the March 2008 quarter.
In June
2008, Ashland received two Revenue Agents Reports (RAR) from the Internal
Revenue Service (IRS) that included the results of the IRS audits for the tax
periods ended September 30, 2004, June 30, 2005 (the date of the completed MAP
Transaction) and September 30, 2005. The first RAR for the tax years
ended September 30, 2004 and June 30, 2005 reflected a refund of approximately
$4 million for the September 2004 tax year and additional federal taxes owed of
approximately $14 million (of which approximately $11 million related to the MAP
Transaction) for the June 2005 tax year. Under the terms of the Tax
Matters Agreement, Marathon is responsible for the payment of the $11 million
related to the MAP Transaction. This amount was received by Ashland
from Marathon. Ashland paid the IRS approximately $12 million in
additional federal taxes and interest for the September 2004 and June 2005 tax
years in July of 2008. The second RAR for the tax year ended
September 30, 2005 reflected a refund to Ashland of approximately $4
million.
As a
result of the structure of the MAP Transaction, Marathon became primarily
responsible for certain of Ashland’s federal and state tax obligations for
positions taken prior to June 30, 2005. However, pursuant to the
terms of the Tax Matters Agreement, Ashland has agreed to indemnify Marathon for
any obligations which arise from those positions. Upon adoption of
FIN 48, these positions, which were previously accounted for as income tax
contingencies by Ashland, are no longer treated in that manner under the
provisions of FIN 48. Subsequent adjustments to these liabilities
will be recorded as a component of selling, general and administrative expenses
within the Statements of Consolidated Income. In accordance with the
prospective adoption requirements under the provisions of FIN 48, Ashland did
not reclassify prior period expenses or income relating to these items that
would have been classified within the selling, general and administrative
caption if FIN 48 was applied retrospectively. For the nine
months ended June 30, 2008, Ashland recorded $2 million of income relating
to these items that was previously recognized as a component of income tax
expense in previous periods.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE J – EARNINGS PER
SHARE
Following
is the computation of basic and diluted earnings per share (EPS) from continuing
operations.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
June
30
|
|
|
June
30
|
|
(In
millions except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted EPS – Income
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
66 |
|
|
$ |
86 |
|
|
$ |
176 |
|
|
$ |
169 |
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic EPS – Weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shares outstanding
|
|
|
63 |
|
|
|
62 |
|
|
|
62 |
|
|
|
63 |
|
Common
shares issuable upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
stock appreciation rights
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Denominator
for diluted EPS – Adjusted weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
shares and assumed conversions
|
|
|
64 |
|
|
|
63 |
|
|
|
63 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.04 |
|
|
$ |
1.37 |
|
|
$ |
2.80 |
|
|
$ |
2.68 |
|
Diluted
|
|
$ |
1.03 |
|
|
$ |
1.35 |
|
|
$ |
2.77 |
|
|
$ |
2.64 |
|
NOTE
K – EMPLOYEE BENEFIT PLANS
As of
June 30, 2008, $9 million had been contributed to the non-U.S. plans and no
contributions have been made to the U.S. plans. Ashland does not
expect to make a contribution to the U.S. plans, but does anticipate an
additional $1 million contribution to the non-U.S. pension plans for the
remainder of fiscal year 2008. The following table details the
components of pension and other postretirement benefit costs.
|
|
|
|
|
|
|
|
Other
postretirement
|
|
|
|
Pension
benefits
|
|
|
benefits
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Three
months ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
8 |
|
|
$ |
8 |
|
|
$ |
1 |
|
|
$ |
2 |
|
Interest
cost
|
|
|
22 |
|
|
|
22 |
|
|
|
2 |
|
|
|
4 |
|
Expected
return on plan assets
|
|
|
(28 |
) |
|
|
(27 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of prior service credit
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
(2 |
) |
Amortization
of net actuarial loss (gain)
|
|
|
1 |
|
|
|
1 |
|
|
|
- |
|
|
|
(4 |
) |
|
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
26 |
|
|
$ |
27 |
|
|
$ |
3 |
|
|
$ |
4 |
|
Interest
cost
|
|
|
67 |
|
|
|
65 |
|
|
|
8 |
|
|
|
10 |
|
Expected
return on plan assets
|
|
|
(82 |
) |
|
|
(76 |
) |
|
|
- |
|
|
|
- |
|
Amortization
of prior service credit
|
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
|
|
(4 |
) |
Amortization
of net actuarial loss (gain)
|
|
|
4 |
|
|
|
13 |
|
|
|
(2 |
) |
|
|
(4 |
) |
|
|
$ |
15 |
|
|
$ |
29 |
|
|
$ |
6 |
|
|
$ |
6 |
|
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
L – CAPITAL STOCK
On
September 14, 2006, Ashland’s Board of Directors authorized the
distribution of a substantial portion of the proceeds of the sale of APAC to the
shareholders of Ashland as a one-time special dividend. Each
shareholder of record as of October 10, 2006 received $10.20 per share, for a
total of $674 million, which was paid on October 25,
2006. Substantially all of the remaining proceeds were directed to be
used to repurchase Ashland Common Stock in accordance with the terms authorized
by Ashland’s Board of Directors and as further described below.
Stock
repurchases were made pursuant to two different programs authorized by Ashland’s
Board of Directors. The first program, originally approved on July
21, 2005, authorized the purchase of $270 million of Ashland Common Stock in the
open market. After 3.5 million shares at a cost of $196 million had
been purchased under the initial authorization, on January 25, 2006, Ashland’s
Board of Directors increased the remaining authorization by $176 million to $250
million. As of September 14, 2006, Ashland had completed all
repurchases to be made under this program. The second program was
authorized by Ashland’s Board of Directors on September 14, 2006, employing the
remaining after-tax proceeds from the sale of APAC to repurchase up to an
additional 7 million shares.
Ashland
repurchased 4.7 million shares for $288 million for the nine months ended
June 30, 2007. Since the inception of the first described share
repurchase program on July 21, 2005 through the completion of the second share
repurchase program on December 19, 2006, Ashland repurchased a total of
13.2 million shares at a cost of $793 million. These repurchases
represented approximately 18% of shares outstanding on June 30,
2005.
NOTE
M – EQUITY AWARDS
Ashland
has stock incentive plans under which key employees or directors are granted
stock options, stock-settled stock appreciation rights (SARs) or nonvested stock
awards. Each program is typically a long-term incentive plan designed
to link employee compensation with increased shareholder value over time or
reward superior performance and encourage continued employment with
Ashland. Ashland began expensing stock awards on October 1, 2002 in
accordance with FAS No. 123 (FAS 123), “Accounting for Stock-Based Compensation”
which was subsequently superseded by FAS No. 123(R) (FAS 123(R)),
“Share-Based Payment,” and recognizes compensation expense for the grant date
fair value of stock-based awards over the applicable vesting
period. Stock-based compensation expense was $7 million and $8
million for each of the nine month periods ended June 30, 2008 and 2007,
respectively, and is included in the selling, general and administrative expense
caption of the Statements of Consolidated Income.
Stock
options and SARs
Stock
options and SARs are granted to employees at a price equal to the fair market
value of the stock on the date of grant and become exercisable over periods of
one to three years. Unexercised stock options and SARs lapse ten
years after the date of grant. SARs granted for the nine months ended
June 30, 2008 and 2007 were 0.4 million and 0.5 million,
respectively. As of June 30, 2008 there was $7 million of total
unrecognized compensation costs related to stock options and
SARs. That cost is expected to be recognized over a weighted-average
period of 1.8 years. In accordance with FAS 123(R) Ashland estimates
the fair value of stock options and SARs granted using the Black-Scholes
option-pricing model. This model requires several assumptions,
which Ashland has developed and updates based on historical trends and current
market observations. The accuracy of these assumptions is critical to
the estimate of fair value for these equity instruments.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
M – EQUITY AWARDS (continued)
Nonvested
stock awards
Nonvested
stock awards are granted to employees or directors at a price equal to the fair
market value of the stock on the date of grant and generally vest over a one to
seven year period. However, such shares are subject to forfeiture
upon termination of service before the vesting period ends. Nonvested
stock awards entitle employees or directors to vote the shares and to receive
any dividends upon grant. Nonvested stock awards granted for the nine
months ended June 30, 2008 and 2007 were less than 10,000 shares for each
period. As of June 30, 2008 there was $4 million of total
unrecognized compensation costs related to nonvested stock
awards. That cost is expected to be recognized over a
weighted-average period of 2.6 years.
NOTE
N – LITIGATION, CLAIMS AND CONTINGENCIES
Asbestos-related
litigation
Ashland
is subject to liabilities from claims alleging personal injury caused by
exposure to asbestos. Such claims result primarily from
indemnification obligations undertaken in 1990 in connection with the sale of
Riley, a former subsidiary. Although Riley was neither a producer nor
a manufacturer of asbestos, its industrial boilers contained some
asbestos-containing components provided by other companies.
Because
claims are frequently filed and settled in large groups, the amount and timing
of settlements and number of open claims can fluctuate significantly from period
to period. Since October 1, 2004, Ashland has been dismissed as a
defendant in 88% of the resolved claims. New claims filed for the
nine months ended June 30, 2008 and 2007 were 3,154 and 3,525 claims,
respectively. A summary of asbestos claims activity
follows.
|
|
Nine
months ended
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
Years
ended September 30
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Open
claims - beginning of period
|
|
|
134 |
|
|
|
162 |
|
|
|
162 |
|
|
|
184 |
|
|
|
196 |
|
New
claims filed
|
|
|
3 |
|
|
|
4 |
|
|
|
4 |
|
|
|
6 |
|
|
|
12 |
|
Claims
settled
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
Claims
dismissed
|
|
|
(20 |
) |
|
|
(26 |
) |
|
|
(30 |
) |
|
|
(25 |
) |
|
|
(18 |
) |
Open
claims - end of period
|
|
|
115 |
|
|
|
139 |
|
|
|
134 |
|
|
|
162 |
|
|
|
184 |
|
A
progression of activity in the asbestos reserve is presented in the following
table.
|
|
Nine
months ended
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
Years
ended September 30
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Asbestos
reserve - beginning of period
|
|
$ |
610 |
|
|
$ |
635 |
|
|
$ |
635 |
|
|
$ |
571 |
|
|
$ |
618 |
|
Reserve
adjustment
|
|
|
2 |
|
|
|
5 |
|
|
|
5 |
|
|
|
104 |
|
|
|
- |
|
Amounts
paid
|
|
|
(32 |
) |
|
|
(23 |
) |
|
|
(30 |
) |
|
|
(40 |
) |
|
|
(47 |
) |
Asbestos
reserve - end of period
|
|
$ |
580 |
|
|
$ |
617 |
|
|
$ |
610 |
|
|
$ |
635 |
|
|
$ |
571 |
|
Ashland
retained Hamilton, Rabinovitz & Associates, Inc. (HR&A) to assist in
developing and annually updating independent reserve estimates for future
asbestos claims and related costs given various assumptions. The
methodology used by HR&A to project future asbestos costs is based largely
on Ashland’s recent experience, including claim-filing and settlement rates,
disease mix, enacted legislation, open claims, and litigation defense and claim
settlement costs. Ashland’s claim experience is compared to the
results of previously conducted epidemiological studies estimating the number of
people likely to develop asbestos-related diseases. Those
studies were undertaken in connection with national analyses of
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
N – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
the
population expected to have been exposed to asbestos. Using that
information, HR&A estimates a range of the number of future claims that may
be filed, as well as the related costs that may be incurred in resolving those
claims.
From the
range of estimates, Ashland records the amount it believes to be the best
estimate of future payments for litigation defense and claim settlement
costs. Ashland reviews this estimate and related assumptions
quarterly and annually updates the results of a non-inflated, non-discounted
51-year model developed with the assistance of HR&A. During the
most recent annual update of this estimate completed during the June 2008
quarter, it was determined that the reserve adjustment for asbestos claims
should be increased by $2 million. Total reserves for asbestos
claims were $580 million at June 30, 2008, compared to $610 million at
September 30, 2007 and $617 million at June 30, 2007.
Projecting
future asbestos costs is subject to numerous variables that are extremely
difficult to predict. In addition to the significant uncertainties
surrounding the number of claims that might be received, other variables include
the type and severity of the disease alleged by each claimant, the long latency
period associated with asbestos exposure, dismissal rates, costs of medical
treatment, the impact of bankruptcies of other companies that are co-defendants
in claims, uncertainties surrounding the litigation process from jurisdiction to
jurisdiction and from case to case, and the impact of potential changes in
legislative or judicial standards. Furthermore, any predictions with
respect to these variables are subject to even greater uncertainty as the
projection period lengthens. In light of these inherent
uncertainties, Ashland believes its asbestos reserve represents the best
estimate within a range of possible outcomes. As a part of the
process to develop Ashland’s estimates of future asbestos costs, a range of
long-term cost models is developed. These models are based on
national studies that predict the number of people likely to develop
asbestos-related diseases and are heavily influenced by assumptions regarding
long-term inflation rates for indemnity payments and legal defense costs, as
well as other variables mentioned previously. Ashland has estimated
that it is reasonably possible that total future litigation defense and claim
settlement costs on an inflated and undiscounted basis could range as high as
approximately $1 billion, depending on the combination of assumptions selected
in the various models. If actual experience is worse than projected
relative to the number of claims filed, the severity of alleged disease
associated with those claims or costs incurred to resolve those claims, Ashland
may need to increase further the estimates of the costs associated with asbestos
claims and these increases could potentially be material over time.
Ashland
has insurance coverage for most of the litigation defense and claim settlement
costs incurred in connection with its asbestos claims, and coverage-in-place
agreements exist with the insurance companies that provide most of the coverage
currently being accessed. As a result, increases in the asbestos
reserve have been largely offset by probable insurance
recoveries. The amounts not recoverable generally are due from
insurers that are insolvent, rather than as a result of uninsured claims or the
exhaustion of Ashland’s insurance coverage.
Ashland
has estimated the value of probable insurance recoveries associated with its
asbestos reserve based on management’s interpretations and estimates surrounding
the available or applicable insurance coverage, including an assumption that all
solvent insurance carriers remain solvent. Approximately 65% of the
estimated receivables from insurance companies are expected to be due from
domestic insurers, of which approximately 80% had a credit rating of B+ or
higher by A. M. Best, as of the latest annual assessment in the June 2008
quarter. The remainder of the insurance receivable is due from London
insurance companies, which generally have lower credit quality ratings, and from
Underwriters at Lloyd’s, which is reinsured by Equitas Limited
(Equitas). Ashland discounts a substantial portion of this piece of
the receivable based upon the projected timing of the receipt of cash from those
insurers. During the March 2007 quarter, a significant amount of
Equitas’ reinsurance of liabilities became reinsured by National Indemnity
Corporation, a member of the Berkshire Hathaway group of insurance companies
with a current A. M. Best rating of A++. As a
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
N – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
result,
Ashland reassessed its assumptions for the receivable recorded from Equitas, and
due to the improved credit quality of this portion of the receivable, Ashland
increased its recorded receivable by $21 million during the March 2007
quarter.
At June
30, 2008, Ashland’s receivable for recoveries of litigation defense and claim
settlement costs from insurers amounted to $468 million, of which $74 million
relates to costs previously paid. Receivables from insurers amounted
to $488 million at September 30, 2007 and $490 million at June 30,
2007. The receivable was increased by $8 million during the June 2008
quarter, reflecting the updated model used for purposes of valuing the reserve
described above, and its impact on the valuation of future recoveries from
insurers.
Environmental
remediation
Ashland
is subject to various federal, state and local environmental laws and
regulations that require environmental assessment or remediation efforts
(collectively environmental remediation) at multiple locations. At
June 30, 2008, such locations included 64 waste treatment or disposal sites
where Ashland has been identified as a potentially responsible party under
Superfund or similar state laws, 105 current and former operating facilities
(including certain operating facilities conveyed to MAP) and about 1,220 service
station properties, of which 163 are being actively
remediated. Ashland’s reserves for environmental remediation amounted
to $160 million at June 30, 2008 compared to $174 million at September 30,
2007 and $183 million at June 30, 2007, of which $127 million at June 30, 2008,
$153 million at September 30, 2007 and $152 million at June 30, 2007 were
classified in other noncurrent liabilities on the Condensed Consolidated Balance
Sheets. The total reserves for environmental remediation reflect
Ashland’s estimates of the most likely costs that will be incurred over an
extended period to remediate identified conditions for which the costs are
reasonably estimable, without regard to any third-party
recoveries. Engineering studies, probability techniques, historical
experience and other factors are used to identify and evaluate remediation
alternatives and their related costs in determining the estimated reserves for
environmental remediation. Ashland regularly adjusts its reserves as
environmental remediation continues. Ashland has estimated the value
of its probable insurance recoveries associated with its environmental reserve
based on management’s interpretations and estimates surrounding the available or
applicable insurance coverage. At June 30, 2008, September 30, 2007
and June 30, 2007, Ashland’s recorded receivable for these probable insurance
recoveries was $42 million, $44 million and $45 million,
respectively. Environmental remediation expense is included within
the selling, general and administrative expense caption of the Statements of
Consolidated Income and on an aggregate basis amounted to $10 million and $11
million for the nine months ended June 30, 2008 and 2007,
respectively. Environmental remediation expense, net of receivable
activity, was $6 million and $4 million for the nine months ended June 30,
2008 and 2007, respectively.
Environmental
remediation reserves are subject to numerous inherent uncertainties that affect
Ashland’s ability to estimate its share of the costs. 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. Although it is not possible
to predict with certainty the ultimate costs of environmental remediation,
Ashland currently estimates that the upper end of the reasonably possible range
of future costs for identified sites could be as high as approximately $240
million. No individual remediation location is material, as the
largest reserve for any site is less than 10% of the remediation
reserve.
Other
legal proceedings
In
addition to the matters described above, there are various claims, lawsuits and
administrative proceedings pending or threatened against Ashland and its current
and former subsidiaries. Such actions are with respect
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
N – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
to
commercial matters, product liability, toxic tort liability, and other
environmental matters, which seek remedies or damages, some of which are for
substantial amounts. While these actions are being contested, their
outcome is not predictable.
NOTE
O – SEGMENT INFORMATION
Ashland’s
businesses are managed along four industry segments: Performance
Materials, Distribution, Valvoline and Water Technologies.
Performance
Materials is a worldwide manufacturer and supplier of specialty chemicals and
customized services to the building and construction, packaging and converting,
transportation, marine and metal casting industries. It is a
technology leader in metal casting consumables and design services; unsaturated
polyester and vinyl ester resins and gelcoats; and high-performance adhesives
and specialty resins.
Distribution
distributes chemicals, plastics and composite raw materials in North America and
plastics in Europe. Distribution also provides environmental
services. Deliveries are made in North America through a network of
owned or leased facilities, third-party warehouses, rail terminals and tank
terminals and locations that perform contract packaging activities for
Distribution. Distribution of thermoplastic resins in Europe is
conducted primarily through third-party warehouses.
Valvoline
is a marketer of premium-branded automotive and commercial oils, automotive
chemicals, automotive appearance products and automotive services, with sales in
more than 100 countries. The Valvoline®
trademark was federally registered in 1873 and is the oldest trademark for
lubricating oil in the United States. Valvoline is also engaged in
the “fast oil change” business through owned and franchised service centers
operating under the Valvoline Instant Oil Change name.
Water
Technologies provides specialized chemicals and consulting services for utility
water treatment, including boiler water, cooling water, fuel and waste
streams. Programs include performance-based feed and control
automation, and remote system surveillance. In addition, Water
Technologies provides process water treatments for the municipal,
extraction/mining, pulp and paper processing, food processing, oil refining and
chemical processing markets. It also provides technical products and
shipboard services for the world’s merchant marine
fleet. Comprehensive marine programs include water and fuel
treatment; maintenance, including specialized cleaners, welding and refrigerant
products and sealants; and fire fighting, safety and rescue products and
services. Water Technologies also provides specialized chemical
additives for the paint and coatings industry.
The
following table presents for each segment sales and operating revenue and
operating income for the three and nine months ended June 30, 2008 and 2007,
respectively.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
O – SEGMENT INFORMATION (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
June
30
|
|
|
June
30
|
|
(In
millions - unaudited)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
AND OPERATING REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Materials
|
|
$ |
425 |
|
|
$ |
400 |
|
|
$ |
1,194 |
|
|
$ |
1,142 |
|
Distribution
|
|
|
1,151 |
|
|
|
1,026 |
|
|
|
3,223 |
|
|
|
2,982 |
|
Valvoline
|
|
|
428 |
|
|
|
407 |
|
|
|
1,209 |
|
|
|
1,141 |
|
Water
Technologies
|
|
|
244 |
|
|
|
201 |
|
|
|
667 |
|
|
|
569 |
|
Intersegment sales
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Materials
|
|
|
(42 |
) |
|
|
(43 |
) |
|
|
(114 |
) |
|
|
(118 |
) |
Distribution
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
|
|
(9 |
) |
Valvoline
|
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
|
|
(6 |
) |
Water
Technologies
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
$ |
2,201 |
|
|
$ |
1,983 |
|
|
$ |
6,166 |
|
|
$ |
5,700 |
|
OPERATING
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Materials
|
|
$ |
19 |
|
|
$ |
33 |
|
|
$ |
50 |
|
|
$ |
81 |
|
Distribution
|
|
|
20 |
|
|
|
12 |
|
|
|
39 |
|
|
|
46 |
|
Valvoline
|
|
|
26 |
|
|
|
28 |
|
|
|
70 |
|
|
|
68 |
|
Water
Technologies
|
|
|
12 |
|
|
|
6 |
|
|
|
16 |
|
|
|
18 |
|
Unallocated
and other
|
|
|
10 |
|
|
|
12 |
|
|
|
10 |
|
|
|
(23 |
) |
|
|
$ |
87 |
|
|
$ |
91 |
|
|
$ |
185 |
|
|
$ |
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Intersegment
sales are accounted for at prices that approximate market value.
NOTE
P – SUBSEQUENT EVENTS
On July
11, 2008, Ashland announced that it had entered into a definitive merger
agreement (the Agreement) with Hercules Incorporated (Hercules) under which
Ashland would acquire all of the outstanding shares of Hercules for $18.60 per
share in cash and 0.093 of a share of Ashland common stock for each share of
Hercules common stock. The merger is conditioned upon, among other
things, the approval of Hercules’ stockholders, the receipt of regulatory
approvals and other closing conditions. The cash portion of the
consideration will be funded through a combination of cash on hand and committed
debt financing from Bank of America and Scotia Capital, subject to customary
terms and conditions. Ashland plans to use the cash flows of the combined
organization to pay down debt with a goal of attaining investment-grade credit
ratings within two to four years after closing the transaction. As a
result of the announcement of the definitive merger agreement with Hercules,
Moody’s Investor Services placed Ashland’s credit ratings under review for a
possible downgrade, while Standard & Poor’s placed Ashland’s credit rating
on CreditWatch. The transaction, which would create a major, global
specialty chemicals company, is expected to close by the end of calendar 2008.
Under the
terms of the Agreement, Hercules would be required to pay Ashland a fee of $77.5
million under certain circumstances, including if Hercules terminates the
Agreement to accept a superior offer, and Ashland would be required to pay
Hercules a fee in the same amount if the transaction is not completed due to
failure to obtain financing at the time the conditions to the merger have been
satisfied. Ashland filed the Agreement with the Securities and
Exchange Commission as an Exhibit to a Current Report on Form 8-K on July 14,
2008. There can be no assurance that the merger will be
completed.
Hercules
is a leader in specialty additives and ingredients that modify the physical
properties of water-based systems and is one of the world’s leading suppliers of
specialty chemicals to the pulp and paper industry with reported net sales of
$2.3 billion for the twelve months ended June 30, 2008. The primary
markets the company serves include pulp and paper, paints and adhesives,
construction materials, food, pharmaceutical, personal care and industrial
specialties which include oilfield, textiles and other general
industries.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on 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. These statements include those made
with respect to Ashland’s operating performance and Ashland’s acquisition of
Hercules Incorporated. These expectations are based upon a number of
assumptions, including those mentioned within this
report. Performance estimates are also based upon internal forecasts
and analyses of current and future market conditions and trends, management
plans and strategies, weather, operating efficiencies and economic conditions,
such as prices, supply and demand, cost of raw materials, and legal proceedings
and claims (including environmental and asbestos matters). These
risks and uncertainties may cause actual operating results to differ materially
from those stated, projected or implied. Such risks and uncertainties
with respect to Ashland’s acquisition of Hercules include the possibility that
the benefits anticipated from the Hercules transaction will not be fully
realized; the possibility the transaction may not close, including as a result
of failure to obtain the approval of Hercules stockholders; the possibility that
financing may not be available on the terms committed; and other risks that are
described in filings made by Ashland with the Securities and Exchange Commission
(SEC) in connection with the proposed transaction. Although Ashland
believes its expectations are based on reasonable assumptions, it cannot assure
the expectations reflected herein will be achieved. This
forward-looking information may prove to be inaccurate and actual results may
differ significantly from those anticipated if one or more of the underlying
assumptions or expectations proves to be inaccurate or is unrealized or if other
unexpected conditions or events occur. Ashland undertakes no
obligation to subsequently update or revise the forward-looking statements made
in this report to reflect events or circumstances after the date of this
report.
ADDITIONAL
INFORMATION
In
connection with the proposed transaction, Ashland and Hercules will be filing
documents with the SEC, including the filing by Ashland of a registration
statement on Form S-4, and the filing by Hercules of a related preliminary and
definitive proxy statement/prospectus. Investors and security holders
are urged to read the registration statement on Form S-4 and the related
preliminary and definitive proxy/prospectus when they become available because
they will contain important information about the proposed
transaction. Investors and security holders may obtain free copies of
these documents (when they are available) and other documents filed with the SEC
at the SEC’s website at www.sec.gov and by contacting Ashland Investor Relations
at (859) 815-4454 or Hercules Investor Relations at (302)
594-7151. Investors and security holders may obtain free copies of
the documents filed with the SEC on Ashland’s Investor Relations website at
www.ashland.com/investors or Hercules’ website at www.herc.com or the SEC’s
website at www.sec.gov.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
The
following table shows information by industry segment for the three and nine
months ended June 30, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
June
30
|
|
|
June
30
|
|
(In
millions - unaudited)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE
MATERIALS (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
per shipping day
|
|
$ |
6.6 |
|
|
$ |
6.3 |
|
|
$ |
6.3 |
|
|
$ |
6.1 |
|
Pounds
sold per shipping day
|
|
|
4.9 |
|
|
|
5.1 |
|
|
|
4.7 |
|
|
|
4.9 |
|
Gross
profit as a percent of sales
|
|
|
17.5 |
% |
|
|
21.9 |
% |
|
|
17.9 |
% |
|
|
21.2 |
% |
DISTRIBUTION (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
per shipping day
|
|
$ |
18.0 |
|
|
$ |
16.3 |
|
|
$ |
17.1 |
|
|
$ |
15.9 |
|
Pounds
sold per shipping day
|
|
|
19.0 |
|
|
|
20.1 |
|
|
|
18.9 |
|
|
|
19.6 |
|
Gross
profit as a percent of sales
|
|
|
7.8 |
% |
|
|
7.1 |
% |
|
|
7.6 |
% |
|
|
8.2 |
% |
VALVOLINE (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lubricant
sales (gallons)
|
|
|
43.8 |
|
|
|
43.4 |
|
|
|
125.7 |
|
|
|
123.8 |
|
Premium
lubricants (percent of U.S. branded volumes)
|
|
|
24.9 |
% |
|
|
24.4 |
% |
|
|
24.6 |
% |
|
|
23.2 |
% |
Gross
profit as a percent of sales
|
|
|
23.9 |
% |
|
|
25.1 |
% |
|
|
24.4 |
% |
|
|
24.8 |
% |
WATER
TECHNOLOGIES (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
per shipping day
|
|
$ |
3.8 |
|
|
$ |
3.2 |
|
|
$ |
3.5 |
|
|
$ |
3.0 |
|
Gross
profit as a percent of sales
|
|
|
37.2 |
% |
|
|
38.2 |
% |
|
|
37.9 |
% |
|
|
39.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Sales
are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and operating
expenses.
|
RESULTS
OF OPERATIONS
Current Quarter – Ashland
reported income from continuing operations of $66 million, $1.03 per share, for
the quarter ended June 30, 2008 compared to $86 million, or $1.35 per share, for
the quarter ended June 30, 2007. The primary factors
contributing to the $20 million decrease in the current quarter were a $4
million decrease in both operating income and net interest and other financing
income and an increase in the current period tax rate to 29.4% compared to the
prior period rate of 15.1%. The decrease in operating income was
primarily due to a $14 million decline in earnings from Performance Materials,
which was partially offset by an $8 million income increase reported by
Distribution. The decrease of $4 million in net interest and other
financing income reflects the lower interest rate environment for short-term
investment instruments compared to the prior period. The lower
effective income tax rate for the prior year’s quarter reflects both an update
to the taxable income estimate for the prior fiscal year as well as favorable
developments with respect to settlements of certain tax matters.
Ashland’s
net income decreased $28 million to $72 million, or $1.13 per share, for the
June 2008 quarter compared to $100 million, or $1.58 per share, for the June
2007 quarter. Net income in the
prior quarter benefited from $14 million, or $.23 per
share, of
after-tax
income from
discontinued operations, compared to income of $6
million, or $.10 per share, during the current quarter. The primary
factor contributing to both periods’ recorded income was favorable
adjustments to the asbestos receivable for insurance recoveries as a result of
Ashland’s ongoing assessment of these matters.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
The
continuing general weakness in the North American economy, where Ashland derives
approximately 70% of its revenues, is causing a decrease in demand while
instability in the raw material markets, where significant cost increases are
continuing to occur, hindered Ashland’s financial performance during the current
quarter. This current economic environment has continued to cause
significant pressure on gross profit margin of each business segment,
particularly within the Performance Materials business. Despite the
economic weakness and gross profit margin pressure, Distribution was able to
increase its gross profit percentage 10% over the prior year’s quarter while
both Valvoline and Water Technologies reported growth in volume.
Operating
income decreased 4% to $87 million in the current quarter from $91 million
during the prior year’s quarter. Sales and operating revenues
(revenues) for the current quarter were $2,201 million, a $218 million, or
11%, increase compared to the $1,983 million recorded in the prior year’s
quarter. The primary factors contributing to this revenue increase
were a $147 million, or 7%, increase in price and an $86 million, or 4%,
increase related to currency exchange.
Gross
profit as a percent of sales decreased 90 basis points from 17.1% in the prior
year’s quarter to 16.2% in the current year’s quarter. Raw material
and other supply costs and currency exchange increased total cost of sales for
the quarter by $153 million, or 9%, and $67 million, or 4%,
respectively. Despite this decline in Ashland’s overall gross profit
percentage, the gross profit margin (in dollars) increased 5% to
$357 million during the current quarter compared to $340 million during the
prior year’s quarter, due to the revenue growth exceeding the overall increase
in cost of sales, contributing $17 million to operating income.
Selling,
general and administrative expenses increased $24 million, or 9%, to $283
million during the current quarter compared to $259 million during the prior
quarter. The increase was primarily attributable to unusually large
favorable adjustments to pension and other benefit costs of $11 million and
environmental reserves of $7 million in the prior year’s quarter. In
addition, the current quarter included a $5 million increase in Distribution’s
incentive compensation expense, as compared to the prior period’s unusually low
expense. These charges, as well as a $13 million increase
related to currency exchange, increased current period selling, general and
administrative charges by approximately $36 million, or 14%, compared to the
prior year’s quarter. Equity and other income contributed an
additional $3 million of operating income during the current quarter compared to
the prior year’s quarter.
Year-to-Date – Income
from continuing operations for the nine months ended June 30, 2008, was
$176 million, or $2.77 per share, a 4% increase compared to $169 million,
or $2.64 per share, for the nine months ended June 30, 2007. The
primary factor contributing to this increase was a $23 million, or $.37 per
share, tax-free gain in the current period from the partial resolution of
certain tax related matters with Marathon related to the MAP
Transaction. This gain was partially offset by a $5 million decrease
in operating income and an $8 million decrease in net interest and other
financing income.
Ashland’s
net income decreased $21 million, or 11%, to $177 million, or $2.78
per share, for the current period compared to $198 million, or $3.09 per share,
during the prior period. Both periods’ results were affected by
results of discontinued operations as income of $1 million, or $.01 per share,
and $29 million, or $.45 per share, were recorded in the current and prior
periods, respectively. The income recorded for both periods primarily
related to activity from asbestos-related items that increased the insurance
receivable, some of which reflected improved credit quality in the prior
period. In addition, adjustments occurred, but to a much lesser
extent, relating to post-closing tax positions on the sale of APAC.
Operating
income decreased 3% to $185 million in the current period from $190 million
during the prior period. Revenues were $6,166 million, a $466
million, or 8%, increase compared to the $5,700 million recorded in the
prior period. The primary factors contributing to this increase in
revenue were a $288 million, or 5%, increase in price and a $240 million,
or 4%, increase related to currency exchange.
Gross
profit as a percent of sales decreased 110 basis points from 17.4% in the prior
period to 16.3% in the current period. Raw material and other supply
costs increased total cost of sales $323 million, or 7%, while currency exchange
caused an additional $190 million, or 4%, increase. Despite this
decline in Ashland’s
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
overall
gross profit percentage, the gross profit margin (in dollars) increased 2% to
$1,008 million during the current quarter compared to $993 million during the
prior year’s quarter, due to the revenue growth, contributing $15 million to
operating income.
Selling,
general and administrative expenses increased $22 million to $856 million during
the current period compared to $834 million during the prior
period. Each period had significant non-recurring charges recorded
within this caption. During the prior period a $25 million charge
related to Ashland’s voluntary severance offer was recorded as well as a
combined $18 million favorable adjustment to pension and other benefit
costs and environmental reserves. The current period included an $8
million charge for the suspension of a joint venture and other costs associated
with future growth opportunities. Currency exchange also added an
additional $35 million increase in expense for the current period as compared to
the prior period. Equity and other income contributed an additional
$2 million of operating income during the current period compared to the prior
period.
BUSINESS
SEGMENT RESULTS
Performance
Materials
Current Quarter – Performance
Materials reported operating income of $19 million for the June 2008 quarter
which represents a 44% decrease from the $33 million reported for the June 2007
quarter, reflecting weaker gross profit margins as a result of increased
raw material costs in all of Performance Materials’ business
units. Revenues increased 6% to $425 million compared to $400 million
in the prior year’s quarter. The increase in currency
exchange of $26 million, or 6%, was the primary factor
for revenue growth during the current quarter as price increases of
$18 million, or 5%, were substantially offset by the decrease in volume of
$19 million, or 5%. The Composite Polymers business unit was the
primary contributor to the fluctuations in price and volume for Performance
Materials. The overall pounds sold per shipping day for Performance
Materials decreased 4% to 4.9 million compared to 5.1 million in the prior
year’s quarter, causing operating income to decline
$7 million. Revenue was reduced by the transfer of certain
sales from Performance Materials to Water Technologies as compared to the prior
year’s quarter. Excluding this effect and the impact of currency
exchange, revenue increased 1%.
Gross
profit as a percent of sales during the quarter decreased 4.4 percentage points
to 17.5%, primarily due to raw material increases of
$30 million. These raw material increases were not fully offset
by price increases, causing operating income to decline by $12
million. The decreases in gross profit for price and volume were,
however, partially offset by an increase from currency exchange of $5
million. Selling, general and administrative expenses increased $3
million, or 5%, primarily due to increases in currency exchange of $3
million. Equity and other income contributed an additional $2 million
of operating income during the current quarter compared to the prior year’s
quarter.
Year-to-Date –
Performance Materials reported operating income of $50 million for the current
period, a 38% decrease from the $81 million reported during the prior
period. Revenues increased 5% to $1,194 million compared to
$1,142 million in the prior year’s period. Increases in currency
exchange of $67 million, or 6%, and price of $36 million, or 3%, were the
primary factors. These increases were offset by volume decreases of
$52 million, or 5%, primarily as a result of weakness in the North American
markets for Composite Polymers and Specialty Polymers and
Adhesives. Pounds sold per shipping day decreased 4% to
4.7 million compared to 4.9 million in the prior
period. This decrease in volume caused operating income to decline
$18 million.
Gross
profit as a percent of sales during the period decreased 3.3 percentage points
to 17.9% primarily due to raw material cost increases of $59
million. These raw material cost increases were not fully offset by
price increases, causing operating income to decline by $23
million. The decreases in gross profit related to price and volume
were however partially offset by an increase from currency exchange of $13
million.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Selling,
general and administrative expenses increased $8 million, or 5%, during the
current period, primarily due to a $7 million increase in currency
exchange. Equity and other income contributed an additional
$5 million of operating income during the current period compared to the
prior period primarily due to a $4 million increase in equity income
associated with joint ventures.
Distribution
Current Quarter –
Distribution’s operating income increased 67% from $12 million during the June
2007 quarter to $20 million during the current quarter. Revenues increased
12% to $1,151 million compared to $1,026 million in the prior year’s
quarter. Price increases, primarily in chemicals and plastics, were
the primary factor in revenue growth causing a $109 million, or 11% increase,
while currency exchange resulted in an additional $28 million, or 3%
increase. These increases were offset by a $12 million decrease in
volume, as pounds sold per shipping day decreased 5% to 19.0 million compared to
20.1 million in the prior year’s quarter, a direct result of the overall
weakness in the North American industrial market for chemicals, plastics and
composites.
Gross
profit as a percent of sales during the quarter increased 0.7 percentage points
to 7.8% primarily due to price increases that more than fully offset the raw
material cost increases of $95 million in the current quarter, causing operating
income to increase $14 million. The currency exchange also increased
gross profit during the current quarter by $2 million. Selling,
general and administrative expenses increased $9 million, or 14%, during
the quarter primarily due to increases in incentive compensation and currency
exchange of $5 million and $2 million, respectively. Equity and other
income contributed an additional $1 million of operating income during the
current quarter compared to the prior year’s quarter.
Year-to-Date –
Distribution reported operating income of $39 million for the current period, a
15% decrease from the $46 million reported during the prior
period. Revenues increased 8% to $3,223 million compared to $2,982
million in the prior period. Price increases, primarily in chemicals
and plastics, were the primary factor in revenue growth causing a $224 million,
or 8%, increase. The currency exchange increase of $86 million,
or 3%, was substantially offset by a $69 million decrease in volume, as pounds
sold per shipping day decreased approximately 4% to 18.9 million compared to
19.6 million in the prior period, causing a decline in operating income of $6
million.
Gross
profit as a percent of sales during the current period decreased 0.6 percentage
points to 7.6%. Although gross profit as a percent of sales
decreased, actual gross profit margin (in dollars) increased $1 million
from the prior period as price increases offset raw material cost increases,
contributing $1 million of operating income. The currency exchange
also increased gross profit during the current period by
$6 million. Selling, general and administrative expenses
increased $9 million, or 4%, during the period primarily due to increases in
salary, benefits and incentive compensation of $6 million and currency exchange
of $5 million.
Valvoline
Current
Quarter – Valvoline’s operating income decreased 6% to $26 million
during the June 2008 quarter from $28 million during the prior year’s
quarter. Revenues increased 5% to $428 million compared to
$407 million in the prior year’s quarter. Increases in price of
$14 million, primarily in branded lubricants and antifreeze product lines, and
currency exchange of $12 million each contributed to the revenue
growth. These increases were partially offset by a combined $5
million decrease in volume and product mix. Lubricant gallons
increased 1% from 43.4 million gallons to 43.8 million gallons in the current
quarter.
Gross
profit as a percent of sales during the quarter decreased 1.2 percentage points
to 23.9%. Despite this decrease, actual gross profit margin (in
dollars) remained flat as the positive volume and currency exchange impact on
gross profit contributed $3 million and $4 million,
respectively. Price increases did not fully offset higher raw
material costs resulting in a $6 million decline in gross profit while product
mix decreased gross profit by $1 million. Selling, general and
administrative expenses increased $1 million during the
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
quarter
from the combination of a $3 million increase in currency
exchange partially offset by decreased travel and advertising
expense.
Year-to-Date –
Valvoline reported operating income of $70 million for the current period,
a 3% increase compared to $68 million reported during the prior
period. Revenues increased 6% to $1,209 million compared to $1,141 million
in the prior year’s period. Increased pricing of $28 million, volume
and mix of $5 million and currency exchange of $35 million all contributed
to the revenue growth. Lubricant volume increased 2% to 125.7 million
gallons.
Gross
profit as a percent of sales during the current period decreased 0.4 percentage
points to 24.4%. Despite this decrease, actual gross profit margin
(in dollars) increased $11 million from the prior period as currency
exchange contributed an increase of $10 million while price increases did not
fully offset increases in raw material costs, causing a net $4 million decline
in operating income. The remaining difference was due to fluctuations
within volume and product mix. Selling, general and administrative
expenses increased $9 million during the current period primarily due to
increases of $4 million for advertising and $7 million for currency
exchange.
Water
Technologies
During
the December 2007 quarter, Water Technologies’ financial reporting structure was
realigned to operate as one unified division in order to take advantage of its
significant scale. The previous division alignment within this
segment of Drew Marine, Drew Industrial and Environmental and Process Solutions
was eliminated.
Current Quarter – Water
Technologies’ operating income increased to $12 million during the June
2008 quarter compared to $6 million during the June 2007 quarter, primarily due
to the benefit of $5 million from the completion of certain large sales
contracts and from favorable adjustments to estimated
liabilities. Revenues increased 21% to $244 million compared to $201
million in the prior year’s quarter. Increases of $21 million in
currency exchange and $19 million in volume were the primary factors
contributing to the increased revenue with price increases adding an additional
$4 million. Revenue growth was impacted during the quarter
by the elimination of a one-month non-North American-entity reporting lag in the
fourth fiscal quarter last year and the transfer of certain sales from
Performance Materials to Water Technologies. Excluding these effects
and the impact of currency exchange, revenues increased by 9%.
Gross
profit as a percent of sales decreased 1.0 percentage point to
37.2%. Despite this decrease, actual gross profit margin (in dollars)
increased $15 million from the prior period as currency exchange contributed an
increase of $8 million with volume increases adding an additional $7
million. These increases were offset by a decrease of $1 million
attributable to raw material cost increases outpacing price
increases. Selling, general and administrative expenses increased
$8 million during the quarter. Currency exchange of
$6 million was the primary factor contributing to the expense
increase.
Year-to-Date – Water
Technologies reported operating income of $16 million for the current period, an
11% decrease compared to $18 million reported during the prior period, as
lower gross profit margin and increased selling, general and administrative
costs were the primary factors in the decreased operating income. Revenues
increased 17% to $667 million compared to $569 million in the prior period,
primarily due to increases of approximately $52 million and $50 million in
currency exchange and volume, respectively.
Gross
profit as a percent of sales decreased 1.2 percentage points to
37.9%. Despite this decrease, actual gross profit margin (in dollars)
increased $31 million from the prior period as currency exchange contributed an
increase of $21 million and volume increases added an additional $19
million. These increases in gross profit were partially offset by
cost increases in raw materials and services of $9 million. Selling,
general and administrative expenses increased $30 million during the current
period partially due to $16 million in
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
currency
exchange. In addition, $4 million related to the transfer of
certain costs from Performance Materials to Water Technologies. The
remaining difference is primarily due to additional implementation costs
associated with the business model redesign as well as costs incurred to support
growth initiatives in China and other international markets. Equity
and other income contributed an additional $3 million of operating income during
the current period compared to the prior period.
Unallocated
and other
Unallocated
and other recorded income of $10 million in the June 2008 quarter compared to
$12 million in the prior year’s quarter. The income recorded in
the June 2008 quarter was primarily due to lower incentive compensation and
direct support costs. The income recorded in the prior year’s quarter
was primarily due to favorable adjustments of $10 million and $4 million
related to environmental remediation and employee benefits,
respectively.
Unallocated
and other recorded income of $10 million for the nine months ended June 30, 2008
compared to a $23 million expense for the nine months ended June 30,
2007. The current period includes $8 million in expense for costs
associated with Ashland’s joint venture with Cargill to manufacture bio-based
propylene glycol, which has been suspended due to persistently high glycerin
input costs and other costs related to growth opportunities. These
costs were more than offset by lower incentive compensation and direct support
costs as compared to the same period in prior year. The
prior nine month period included a $25 million charge for costs associated
with Ashland’s voluntary severance offer. As a result of the APAC
divestiture in August 2006, it was determined that certain identified corporate
costs that had previously been allocated to that business needed to be
eliminated to maintain Ashland’s overall competitiveness. As a means
to eliminate those costs, Ashland offered an enhanced early retirement or
voluntary severance opportunity to administrative and corporate employees during
fiscal year 2007. In total, Ashland accepted voluntary severance
offers from 172 employees under the program. As a result, a
$25 million pretax charge was recorded for severance, pension and other
postretirement benefit costs during fiscal year 2007.
Gain
(loss) on the MAP Transaction
Ashland
recorded gains on the MAP Transaction of $1 million and $23 million for the
three and nine months ended June 30, 2008, and a $1 million gain and a $3
million loss for the three and nine months ended June 30,
2007. The gain for the nine month period ended June 30,
2008 primarily relates to a settlement with Marathon on certain tax
related matters associated with the MAP Transaction during the second quarter of
the current year, which resulted in a $23 million gain (see Note E of the Notes
to Condensed Consolidated Financial Statements for
further details). The gains and losses associated with this
caption for the remaining periods are the result of adjustments in the recorded
receivable for future estimated tax deductions related primarily to
environmental and other postretirement reserves. For further
information on this transaction see Note C of the Notes to Consolidated
Financial Statements in Ashland’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2007.
Net
interest and other financing income
Net
interest and other financing income amounted to $5 million and $9 million for
the three months ended June 30, 2008 and 2007, and $26 million and $34 million
for the nine months ended June 30, 2008 and 2007. These decreases in
the current periods compared to prior year periods are primarily due to a $4
million and $8 million decrease in interest income during the three and nine
month periods ended June 30, 2008, reflecting the lower interest rate
environment for short-term investment instruments compared to the prior period
rates, as interest expense and other financial costs have remained
consistent.
Income
taxes
Ashland’s
effective income tax rate was 29.4% for the three months ended June 30, 2008,
compared to 15.1% for the three months ended June 30, 2007. The lower
effective income tax rate for the prior year’s
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
quarter
reflects both an adjustment to the updated estimate of taxable income for the
prior fiscal year as well as favorable developments with respect to settlements
of certain tax matters, which were offset by a $2 million charge for
various tax contingency matters. Ashland’s effective income tax rate
for the nine months ended June 30, 2008 was 24.7%, compared to 23.3% for
the nine months ended June 30, 2007. For additional information on
tax-related items see Notes E and I of Notes to the Condensed Consolidated
Financial Statements.
Discontinued
operations (net of income taxes)
Income
from discontinued operations was $6 million and $1 million for the three and
nine months ended June 30, 2008 compared to $14 million and $29 million for the
three and nine months ended June 30, 2007. The income for the three
months ended June 30, 2008 and 2007 was primarily due to favorable adjustments
of $7 million and $16 million, respectively, to the asbestos receivable for
insurance recoveries as a result of Ashland’s ongoing assessment of these
matters. The income for the prior year nine month period ended
June 30, 2007 also includes an additional income adjustment of $21 million
to the asbestos receivable for insurance recoveries reflecting revised
assumptions for the credit quality of the receivable recorded from Equitas,
following Equitas’ transactions with Berkshire Hathaway. These income
items for the three and nine months ended June 30, 2008 and 2007 were partially
offset by post-closing tax adjustments to the gain on the sale of
APAC. For further information on results from discontinued operations
see Note D of Notes to the Condensed Consolidated Financial
Statements.
FINANCIAL
POSITION
Liquidity
Cash
flows from operating activities from continuing operations, a major source of
Ashland’s liquidity, amounted to a cash inflow of $334 million for the nine
months ended June 30, 2008, compared to a cash inflow of $8 million for the nine
months ended June 30, 2007. The cash inflow during the current
period compared to the prior period primarily reflects a $324 million cash
improvement in operating assets and liabilities, which increased from a $258
million cash outflow for the nine months ended June 30, 2007 to a $66 million
cash inflow for the nine months ended June 30, 2008. The cash inflow
was primarily attributable to changes within accounts receivable, inventory and
accounts payable. These captions generated $45 million of cash inflow
during the first nine months of fiscal 2008 compared to the $235 million
cash outflow from the same captions during the first nine months of fiscal
2007.
Following
the MAP Transaction in June 2005, Moody’s lowered Ashland’s senior debt rating
from Baa2 to Ba1, their highest non-investment grade rating, and also lowered
Ashland’s commercial paper rating from P-3 to N-P (Not-Prime), citing the annual
cash flow lost from the operations sold. In August 2006, Standard
& Poor’s lowered Ashland’s senior debt rating from BBB- to BB+, their
highest non-investment grade rating, and lowered Ashland’s commercial paper
rating from A-3 to B, citing Ashland’s intention to distribute the APAC proceeds
to shareholders instead of using the proceeds for business
investment. In November 2006, Ashland terminated its commercial paper
program.
In April
2007, Ashland replaced its revolving credit agreement with a new five year
revolving credit facility which provides for up to $300 million in
borrowings. Up to an additional $100 million in borrowings is
available with the consent of one or more of the lenders. The
borrowing capacity under this new facility was reduced by $101 million for
letters of credit outstanding under the credit agreement at June 30,
2008. The revolving credit agreement contains a covenant limiting the
total debt Ashland may incur from all sources as a function of Ashland’s
stockholders’ equity. The covenant’s terms would have permitted
Ashland to borrow $4.9 billion at June 30, 2008, in addition to the actual
total debt incurred at that time. Permissible total Ashland debt
under the covenant’s terms increases (or decreases) by 150% for any increase (or
decrease) in stockholders’ equity.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
At June
30, 2008, working capital (excluding debt due within one year) amounted to
$1,916 million, compared to $2,129 million at September 30, 2007 and $2,050
million at June 30, 2007. Ashland’s working capital is affected by
its use of the LIFO method of inventory valuation. That method valued
inventories below their replacement costs by $185 million at June 30, 2008, $155
million at September 30, 2007 and $153 million at June 30,
2007. Liquid assets (cash, cash equivalents, available-for-sale
securities and accounts receivable) amounted to 199% of current liabilities at
June 30, 2008, compared to 219% at September 30, 2007 and 214% at June 30,
2007.
At June
30, 2008, Ashland held at par value $275 million of student loan auction
rate securities, which are variable-rate debt securities and have a long-term
maturity with the interest rates being reset through a dutch auction process
typically held every 7 or 28 days, for which there was not an active market.
Auction rate securities have historically traded at par value and are
callable at par value at the option of the issuer. At June 30, 2008,
all the student loan instruments held by Ashland were AAA rated and
collateralized by student loans which have guarantees by the U.S. government
under the Federal Family Education Loan Program.
Until
February 2008, the auction rate securities market was highly
liquid. Starting mid-February 2008, a substantial number of auctions
became largely illiquid as there was not enough demand to sell all of the
securities that holders desired to sell at auction. Because the
auction rate securities market has failed to achieve equilibrium since
mid-February, Ashland determined that there is insufficient observable auction
rate securities market information available to determine the fair value of the
student loan securities. As a result, Ashland developed an internal
valuation model to estimate fair value based on discounted cash
flows. Assumptions used in estimating fair value include credit
quality, liquidity, estimates on the probability of the issue being called prior
to final maturity, and the impact due to extended periods of maximum auction
rates. Based on this internal valuation model, Ashland has recorded a
temporary impairment of $8 million related to the student loan securities as of
June 30, 2008. Any 25 basis point change in the discount rate or
three month adjustment in the duration assumptions would impact the internal
valuation model by approximately $1 million.
Ashland
believes this adjustment in valuation is necessary to account for the current
limited liquidity of these instruments and should be
temporary. Ashland believes these securities ultimately will be
liquidated without significant loss primarily due to the quality of the
collateral securing most of the instruments as well as based on recent actions
being taken to correct the current failed auctions in this
marketplace. However, the period of time it could take to ultimately
realize the securities’ par value is currently not determinable and may be
longer than twelve months. As a result, Ashland has classified these
instruments as long-term auction rate securities at June 30, 2008 in Ashland’s
Condensed Consolidated Balance Sheet. Ashland has the intent and
ability to hold the auction rate securities for a sufficient period of time to
allow for recovery of the principal amounts invested.
Capital
resources
On
September 14, 2006, Ashland’s Board of Directors authorized the
distribution of a substantial portion of the proceeds of the sale of APAC to the
Ashland Common Stock shareholders as a one-time special
dividend. Each shareholder of record as of October 10, 2006, received
$10.20 per share, for a total of $674 million, which was paid on October
25, 2006. Substantially all of the remaining proceeds were directed
to be used to repurchase Ashland Common Stock in accordance with the terms
authorized by Ashland’s Board of Directors. See Note L of Notes to
Condensed Consolidated Financial Statements for a description of Ashland’s share
repurchase programs.
Ashland
repurchased 4.7 million shares for $288 million in the December 2006
quarter. Since the inception of the first described share repurchase
program on July 21, 2005 through the completion of the second share repurchase
program on December 19, 2006, Ashland repurchased a total of 13.2 million
shares at a cost of $793 million. These repurchases represented
approximately 18% of shares outstanding on June 30, 2005.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
For the
nine months ended June 30, 2008, property additions amounted to $118 million,
compared to $102 million for the same period last year. Ashland
anticipates meeting its remaining 2008 capital requirements for property
additions and dividends from internally generated funds. Ashland’s
debt level amounted to $65 million at June 30, 2008, compared to $69 million at
September 30, 2007 and $70 million at June 30, 2007.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
During
the December 2007 quarter, Ashland adopted the provisions of FIN 48 as discussed
in Note I of Notes to Condensed Consolidated Financial
Statements. There have been no other material changes in the critical
accounting policies described in Management’s Discussion and Analysis (MD&A)
in Ashland’s Annual Report on Form 10-K for the fiscal year ended September 30,
2007. For a discussion of Ashland’s asbestos-related litigation and
environmental remediation matters, see Note N of Notes to the Condensed
Consolidated Financial Statements.
OUTLOOK
Performance
Materials’ results will continue to be affected by the soft North American
construction and transportation markets. In addition, raw material costs
continue to increase at an accelerated rate, limiting Performance Materials’
ability to recover the full impact of these commodity pricing
pressures. Performance Materials continues to act aggressively to
recover these raw material increases and recently announced price increases
effective for July and August. However, due to the timing of the cost
increases Performance Materials does not expect to fully recover the raw
materials increases through its gross profit margin until the end of the
September quarter. As a result of these factors and the normal
seasonality of the business, Ashland expects Performance Materials’ operating
income for the upcoming September quarter to be down significantly versus the
June 2008 quarter.
Distribution’s
results for the June quarter are encouraging considering the difficult market
conditions, demonstrating its ability to quickly recover product cost
increases. Despite the positive operating results and improved gross
profit percentage in the current quarter, Distribution continues to focus
heavily on improving this business’ margins to more historical levels and
reducing working capital requirements as the upcoming September quarter will
continue to be affected by weakness in North American industrial
output. However, Distribution expects to significantly improve
operating results versus the weak fourth quarter in the prior year, although it
is unlikely to achieve another sequential quarterly increase, due primarily to
seasonality of its business.
Valvoline
expects to incur the full impact of recent, significant base-oil and additive
cost increases in the fourth quarter of fiscal year 2008. Price
increases have already been announced for this business that should fully offset
these cost increases, with full raw material cost recovery expected by the end
of the September 2008 quarter. However, the time lag on the
implementation of these price increases will likely lead to significantly
reduced, but positive, earnings for Valvoline in the upcoming September quarter
as compared with the prior year’s quarter.
Water
Technologies continues to focus on improving its pricing process while reducing
selling, general and administrative expenses. Price increases
announced in June are expected to fully offset previously announced raw material
increases in this business. While operating income in the current
quarter included the favorable effects of certain items not expected to repeat
going forward, Ashland does expect that this business will continue to build on
the positive pricing momentum and cost reductions that occurred during the
current quarter.
Ashland
is significantly ahead of plan in achieving its previously announced annualized
cost savings of $40 million by year-end fiscal 2009. Through the June
quarter, Ashland has achieved run-rate savings of $22 million, primarily in
its Water Technologies and Performance Materials businesses. Ashland
expects to
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
have
run-rate savings well in excess of $40 million by the beginning of the December
quarter. In addition, Ashland’s internal benchmark of
operating-segment trade working capital to sales decreased by nearly
0.5 percent of annualized sales in the June quarter, excluding the impact
of working capital added through acquisitions. Ashland expects to achieve
further reductions in the working capital requirements of its businesses in
future periods.
While the
economic environment continues to present challenges, Ashland has announced a
number of strategic moves that will enhance its profile as a specialty chemicals
company. In June, Ashland completed the acquisition of the
pressure-sensitive adhesives and atmospheric emulsions businesses from Air
Products. In addition, the proposed 50-50 joint venture between
Ashland and Süd-Chemie was announced in June to combine foundry-related
businesses and take advantage of strong growth opportunities and scale in the
global metal casting industry. This transaction is anticipated to
close by early calendar 2009. Finally and most important, in
July, Ashland announced the pending acquisition of Hercules Incorporated,
which will create a specialty chemical core composed of three businesses:
specialty additives and ingredients, paper and water technologies, and specialty
resins. The transaction, which would create a major, global specialty
chemicals company, is conditioned upon, among other things, the approval of
Hercules’ shareholders, the receipt of regulatory approvals and other customary
closing conditions.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Ashland’s
market risk exposure at June 30, 2008 is generally consistent with the types and
amounts of market risk exposures presented in Ashland’s Annual Report on Form
10-K for the fiscal year ended September 30, 2007.
ITEM
4. CONTROLS AND PROCEDURES
(a)
|
As
of the end of the period covered by this quarterly report, Ashland, under
the supervision and with the participation of its management, including
Ashland’s Chief Executive Officer and its Chief Financial Officer,
evaluated the effectiveness of Ashland’s disclosure controls and
procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the
Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures were
effective.
|
(b)
|
During
the December 2007 quarter, as part of Ashland’s on-going SAP®
enterprise resource planning (ERP) project, the ERP system was implemented
for the majority of Ashland̵ |