UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________________
FORM
10-K
x ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the fiscal year ended September 30, 2009
OR
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.
|
Kentucky
(State
or other jurisdiction
of
incorporation or organization)
|
20-0865835
(I.R.S.
Employer Identification No.)
|
50 E.
RiverCenter Boulevard
P.O. Box
391
Covington,
Kentucky 41012-0391
Telephone
Number (859) 815-3333
Securities
Registered Pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
||
|
Common
Stock, par value $.01 per share
|
New
York Stock Exchange
|
Securities
Registered Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the Registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
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 ¨
(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 Act). Yes o No þ
At March
31, 2009, the aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $761,892,434. In determining this
amount, the Registrant has assumed that its directors and executive officers are
affiliates. Such assumption shall not be deemed conclusive for any other
purpose.
At
October 30, 2009, there were 74,915,769 shares of Registrant’s common stock
outstanding.
Documents
Incorporated by Reference
Portions
of Registrant’s Proxy Statement (the “Proxy Statement”) for its January 28, 2010
Annual Meeting of Shareholders are incorporated by reference into Part III of
this annual report on Form 10-K to the extent described
herein.
TABLE OF
CONTENTS
| Page | ||||
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PART
I
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||||
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Item
1.
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Business
...................................................................................................................................................................
|
1
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||
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General
....................................................................................................................................................................
|
1
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|||
| Ashland Aqualon Functional Ingredients ......................................................................................................... | 2 | |||
| Ashland Hercules Water Technologies ............................................................................................................. | 2 | |||
| Ashland Performance Materials .......................................................................................................................... | 3 | |||
| Ashland Consumer Markets ................................................................................................................................ | 4 | |||
|
Ashland Distribution
...........................................................................................................................................
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5
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|||
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Miscellaneous
.......................................................................................................................................................
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6
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|||
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Item
1A.
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Risk
Factors
.............................................................................................................................................................
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8
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||
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Item
1B.
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Unresolved
Staff Comments
.................................................................................................................................
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11
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||
|
Item
2.
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Properties
.................................................................................................................................................................
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11
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||
|
Item
3.
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Legal
Proceedings
..................................................................................................................................................
|
12
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||
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Item
4.
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Submission
of Matters to a Vote of Security Holders
......................................................................................
|
13
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Item
X.
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Executive
Officers of Ashland
..............................................................................................................................
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13
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PART
II
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||||
|
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of
Equity Securities
........................................................................................
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14
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||
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Performance
Graph
...............................................................................................................................................
|
15
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|||
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Item
6.
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Selected Financial Data
.........................................................................................................................................
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16
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Item
7.
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Management’s
Discussion and Analysis of Financial
Condition and Results of
Operations
................................................................................................................
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16
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||
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Item
7A
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Quantitative
and Qualitative Disclosures about Market Risk
..........................................................................
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16
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||
|
Item
8.
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Financial
Statements and Supplementary Data
..................................................................................................
|
16
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||
|
Item
9.
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Changes
in and Disagreements with Accountants
on Accounting and Financial
Disclosure
.........................................................................................................
|
16
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||
|
Item
9A.
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Controls
and Procedures
.......................................................................................................................................
|
16
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||
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Item
9B.
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Other
Information ....................................................................................................................................................
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16
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||
|
PART
III
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||||
|
Item
10.
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Directors,
Executive Officers and Corporate Governance
................................................................................
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17
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||
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Item
11.
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Executive
Compensation
........................................................................................................................................
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17
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Item
12.
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Security
Ownership of Certain Beneficial Owners
and Management and Related
Stockholder Matters
.......................................................................................
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17
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||
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
........................................................................................................................................................
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18
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Item
14.
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Principal
Accountant Fees and Services
.............................................................................................................
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18
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PART
IV
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||||
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Item
15.
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Exhibits
and Financial Statement Schedules
.......................................................................................................
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18
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||
PART
I
ITEM
1. BUSINESS
GENERAL
Ashland
Inc. is a Kentucky corporation, with its principal executive offices located at
50 E. RiverCenter Boulevard, Covington, Kentucky 41011 (Mailing Address: 50 E.
RiverCenter Boulevard, P.O. Box 391, Covington, Kentucky 41012-0391) (Telephone:
(859) 815-3333). Ashland was organized in 2004 as the successor to a
Kentucky corporation of the same name organized on October 22,
1936. The terms “Ashland” and the “Company” as used herein include
Ashland Inc., its predecessors and its consolidated subsidiaries, except where
the context indicates otherwise.
On
November 13, 2008, Ashland completed the acquisition of Hercules
Incorporated (“Hercules”) through a subsidiary merger transaction (the “Hercules
Transaction”). As a result of the Hercules Transaction, Hercules
became a wholly-owned subsidiary of Ashland. Each share of Hercules
Common Stock outstanding at the effective time of the merger was exchanged for
(i) 0.0930 of a share of Ashland Common Stock and (ii) $18.60 in
cash. The cash portion of the acquisition consideration was funded
through a combination of cash on hand and debt financing. For
additional information regarding the Hercules Transaction, see Note B of “Notes
to Consolidated Financial Statements” in this annual report on Form
10-K.
Ashland
now operates through five reportable segments: Ashland Aqualon
Functional Ingredients, previously Hercules’ Aqualon Group; Ashland Hercules
Water Technologies, which includes the former Hercules’ Paper Technologies and
Ventures segment as well as Ashland’s former Water Technologies segment; Ashland
Performance Materials; Ashland Consumer Markets (Valvoline); and Ashland
Distribution.
Financial
information about these segments for each of the fiscal years in the three-year
period ended September 30, 2009, is set forth in Note Q of “Notes to
Consolidated Financial Statements” in this annual report on Form
10-K.
Ashland
Aqualon Functional Ingredients is one of the world’s largest producers of
cellulose ethers and pale wood rosin derivatives. It provides
specialty additives and functional ingredients that manage the physical
properties of aqueous (water-based) and nonaqueous systems. Many of
its products are derived from renewable and natural raw materials and perform in
a wide variety of applications.
Ashland
Hercules Water Technologies is a leading global producer of papermaking
chemicals and a leading specialty chemicals supplier to the pulp, paper,
commercial and institutional, food and beverage, chemical, mining and municipal
markets. Its process, water treatment and functional chemistries are
used to improve operational efficiencies, enhance product quality, protect plant
assets, and ensure environmental compliance.
Ashland
Performance Materials is a global leader in unsaturated polyester resins and
vinyl ester resins. In addition, it provides customers with leading
technologies in gelcoats, pressure-sensitive and structural adhesives, and metal
casting consumables and design services.
Ashland
Consumer Markets, which includes the Valvoline® family of products and services,
is a leading innovator, marketer and supplier of high-performing automotive
lubricants, chemicals and appearance products. Valvoline, the world’s
first lubricating oil, is the number three passenger car motor oil brand, and
Valvoline Instant Oil Change represents the number two quick-lube franchise in
the United States.
Ashland
Distribution is a leading plastics and chemicals distributor in North America.
It distributes chemicals, plastics and composite raw materials in North America,
as well as plastics in Europe and China. Ashland Distribution also
provides environmental services in North America, including hazardous and
nonhazardous waste collection, recovery, recycling and disposal
services.
At
September 30, 2009, Ashland and its consolidated subsidiaries had approximately
14,700 employees (excluding contract employees).
Available Information — Ashland’s Internet address is http://www.ashland.com. On this website, Ashland makes available,
free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports as well as any
beneficial ownership reports of officers and directors filed electronically on
Forms 3, 4 and 5. All such reports will be available as soon as
reasonably practicable after Ashland electronically files such material with, or
furnishes such material to, the Securities and Exchange Commission
(“SEC”). Ashland also makes available free of charge on its website,
its Corporate Governance Guidelines; Board Committee Charters; Director
Independence Standards; and its code of business conduct which applies to
Ashland’s directors, officers and employees.
1
These documents are also available in print to any
shareholder who requests them. Information contained on Ashland’s
website is not part of this annual report on Form 10-K and is not incorporated
by reference in this document. The public may read and copy any
materials Ashland files with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC.
ASHLAND
AQUALON FUNCTIONAL INGREDIENTS
Ashland
Aqualon Functional Ingredients (“Functional Ingredients”) offers products that
are primarily designed to modify the properties of aqueous
systems. Most of Functional Ingredients’ products are sold as key
ingredients to other manufacturers where they are used as small-quantity
additives to provide functionality such as thickening and rheology control;
water retention; adhesive strength; binding power; film formation; protective
colloid, suspending and emulsifying action; foam control; and pH
stability. Functional Ingredients has a diversified, global customer
base across nearly all of its businesses serving a broad range of applications
within each business.
Functional
Ingredients is comprised of the following businesses:
Regulated Industries —
Regulated Industries’ food applications include bakery, beverage, confectionary,
dairy, meat, meat analogues and pet food, prepared foods and sauces, dressings
and fillings. Personal care applications include cosmetics, hair
care, oral care, skin care, wound care and household products. In the
pharmaceutical industry, Regulated Industries’ products are used for tablet
binding, coatings, modified release and liquid and semi-liquid rheology
control.
Coatings Additives — Coatings
Additives offers a portfolio of complete rheology solutions for consistent,
superior performance at very low use levels. For manufacturers of
paints and other waterborne coatings products, these additives are crucial in
controlling key product characteristics such as gloss, spatter, leveling and
build, all of which are critical to delivering paints and coatings that fill
specific market demand.
Construction — Construction’s
product applications include tile and adhesive cements, gypsum plasters,
renders, joint compounds, concrete, external insulation systems, masonry and
mortar cements and self-leveling compounds and provide a comprehensive array of
functional properties including thickening, water retention, sag resistance,
workability and consistency, adhesion, stabilization, pumping, rheological
properties and strength.
Energy and Specialties Solutions
— Energy and Specialties Solutions offers water-soluble solutions for a
variety of applications in the oil and gas industries including completion and
workover fluids, drill-in fluids, oil-well cementing slurries, sodium formate,
solvent thickeners and stimulation and hydraulic fracturing. This
business also provides high-performance products to the industrial specialties
market including applications in adhesives and glues, agricultural products,
ceramics, fire-fighting fluids, foundry, industrial cleaners, inks and printing,
mining, paint removers, paper and paper coatings, suspension polymerization,
tobacco and welding rods.
Functional Ingredients currently conducts manufacturing
in the Americas, Europe and Asia Pacific at ten facilities in five countries and
participates in one joint venture. Functional Ingredients operates
manufacturing facilities in Wilmington, Delaware; Brunswick and Dalton, Georgia;
Parlin, New Jersey; Kenedy, Texas; and Hopewell, Virginia within the United
States and Doel-Beveren, Belgium; Jiangmen, China; Alizay, France; and
Zwijndrecht, the Netherlands. Functional Ingredients also operates two
production facilities through a joint venture in Luzhou and Suzhou,
China. In addition, Functional Ingredients is currently constructing
a large-capacity hydroxyethylcellulose production facility in Nanjing,
China scheduled to begin operations in late 2010.
Functional
Ingredients’ businesses use raw materials derived from natural, petroleum and
inorganic feedstocks obtained from a diversified supplier portfolio and
maintains multiple suppliers for important raw materials in all
regions.
ASHLAND
HERCULES WATER TECHNOLOGIES
Ashland
Hercules Water Technologies (“Water Technologies”) is a global service business
delivering differentiated specialty chemical
products to several industries including the paper, pulp, chemical, commercial
and institutional, food and beverage, mining and municipal
industries. Water Technologies is a leading global producer of
papermaking chemicals for pulp and paper processing, tissues and towels,
packaging, printing and writing papers, and virgin and deinked
pulps. Its process, water treatment and functional chemistries are
used to improve operational efficiencies, enhance product quality, protect plant
assets and ensure environmental compliance.
2
Water
Technologies is comprised of the following businesses:
Functional Chemistries — The
Functional Chemistries business produces specialized chemicals for the paper
industry that impart specific properties such as strength, liquid holdout and
printability to the final paper or board. Product lines include
sizing agents, wet/dry strength additives and very specific products such as
crepe and release additives for tissue manufacturing.
Process Chemistries — The
Process Chemistries business manufactures and sells a broad array of deposit
control agents, defoamers, biocides and other process additives for markets
including pulp and paper manufacturing, food processing, oil refining and
chemical processing, general manufacturing and
extraction/mining. This business’s products are designed to deliver
benefits such as enhanced operational efficiencies, system cleanliness, and
superior performance in a wide variety of manufacturing operations
globally.
Water Treatment Chemistries —
The Water Treatment Chemistries business provides specialized chemicals and
consulting services for the utility water treatment market, which includes
boiler water, cooling water, fuel and waste streams. Programs include
performance-based feed and control automation and remote system
surveillance. These products and services help ensure that water
meets desired specifications, and aid in asset preservation and longevity as
well as odor control.
Water Technologies operates throughout the
Americas, Europe and Asia Pacific. It has 31 manufacturing facilities in 18 countries and
participates in two joint ventures. Water Technologies has
manufacturing plants in Macon and Savannah, Georgia; Chicopee, Massachusetts;
Louisiana, Missouri; Greensboro, North Carolina; Portland, Oregon; Houston,
Texas; Franklin, Virginia; Beckley, West Virginia; and Milwaukee, Wisconsin
within the United States and Chester Hill, Australia; Beringen, Belgium;
Americana, Leme and Paulinia, Brazil; Burlington, Canada; Beijing and Shanghai,
China; Somercotes, England; Tampere, Finland; Krefeld and Sobernheim, Germany;
Perawang, Indonesia; Busnago, Italy; Mexico City, Mexico; Zwijndrecht, the
Netherlands; Perm, Russia; Tarragona, Spain; Kim Cheon, South Korea;
Helsingborg, Sweden; and Nantou, Taiwan. Through separate joint
ventures, it has production facilities in Navi Mumbai, India and Seoul, South
Korea.
Key raw
materials used in the Water Technologies’ businesses are largely available from
multiple suppliers in quantities sufficient to meet expected
demand.
On August
31, 2009, Ashland completed the sale of its global marine services business,
Drew Marine, to J. F. Lehman & Co. for approximately $120 million before
tax, which was subsequently reduced by $4 million after giving affect to
post-closing adjustments related to working capital. The marine
services business provides water and fuel treatment; specialized cleaners;
sealing, welding and refrigerant products; and fire fighting, safety and rescue
products and services to the global marine industry.
ASHLAND
PERFORMANCE MATERIALS
Ashland
Performance Materials (“Performance Materials”) is a worldwide manufacturer and
supplier of specialty chemicals and customized services to the building and
construction, transportation, metal casting, packaging and converting, and
marine markets. It is a technology leader in unsaturated polyester
and vinyl ester resins and gelcoats; high-performance adhesives and specialty
resins; and metal casting consumables and design services.
Performance
Materials is comprised of the following businesses:
Composites and Adhesives —
The Composites and Adhesives business manufactures and sells a broad range of
corrosion-resistant, fire-retardant, general-purpose and high-performance grades
of unsaturated polyester and vinyl ester resins, gelcoats and low-profile
additives for the reinforced plastics industry. Key markets include
the transportation, construction, marine and infrastructure end markets. It also
markets vinyl ester resins under the DERAKANE®, HETRON® and AROPOL® brand
names.
The
Composites and Adhesives business also manufactures and sells adhesive solutions
to the packaging and converting, building and construction, and transportation
markets and manufactures and markets specialty coatings and adhesive solutions
across the printing industry. Key technologies and markets include:
acrylic polymers for pressure-sensitive adhesives; polyvinyl acetate emulsions;
urethane adhesives for flexible packaging applications; aqueous and
radiation-curable adhesives and specialty coatings for the printing and
converting applications; hot-melt adhesives for various packaging applications;
emulsion polymer isocyanate adhesives for structural wood bonding; elastomeric
polymer adhesives and butyl rubber roofing tapes for commercial roofing
applications; acrylic, polyurethane and epoxy structural adhesives for bonding
fiberglass reinforced plastics, composites, thermoplastics and metals in
automotive, marine, recreational and industrial applications; specialty phenolic
resins for paper impregnation and friction material bonding.
3
Casting Solutions — Casting
Solutions manufactures and sells metal casting chemicals worldwide, including
sand-binding resin systems, refractory coatings, release agents, engineered sand
additives and riser sleeves. This business also provides casting
process modeling, core-making process modeling and rapid prototyping
services. In June 2008, Ashland and Süd-Chemie AG signed a nonbinding
memorandum of understanding to form a new, global 50-50 joint venture to serve
the foundries and the metal casting industry. The joint venture would
combine three businesses: Ashland’s Casting Solutions business, the
foundry-related businesses of Süd-Chemie, and Ashland-Südchemie-Kernfest GmbH,
the existing European-based joint venture between Ashland and
Süd-Chemie. As a result of global economic developments, the scope
and other aspects of this project are being re-evaluated by Ashland and
Süd-Chemie AG.
Performance Materials operates throughout the
Americas, Europe and Asia Pacific. It has 29 manufacturing facilities and participates in eight
manufacturing joint ventures in 15 countries. Composites and
Adhesives has manufacturing plants in Fort Smith and Jacksonville, Arkansas; Los
Angeles, California; Bartow, Florida; Calumet City, Illinois; Elkton, Maryland;
Ashland and Columbus, Ohio; White City, Oregon; Philadelphia and Pittsburgh,
Pennsylvania; Piedmont, South Carolina; and Milwaukee, Wisconsin within the
United States and Campinas, Brazil; Kelowna and Mississauga, Canada; Changzhou
and Kunshan, China; Kidderminster, England; Porvoo and Lahti, Finland;
Sauveterre, France; Miszewo, Poland; Benicarlo, Spain; and, through separate
joint ventures, has manufacturing plants in Sao Paulo, Brazil and Jeddah, Saudi
Arabia. Casting Solutions has manufacturing sites located in Cleveland, Ohio
(two sites), United States and in Campinas, Brazil; Mississauga, Canada;
Changzhou, China; Kidderminster, England; Milan, Italy; and Castro-Urdilales and
Idiazabal, Spain. Casting Solutions also has joint venture manufacturing
facilities located in Vienna, Austria; Bendorf and Wuelfrath,
Germany; Ulsan, South Korea; Arceniega, Spain; and Alvsjo,
Sweden.
Key raw
materials used in the Performance Materials businesses are largely available
from multiple suppliers in quantities sufficient to meet expected
demand.
ASHLAND
CONSUMER MARKETS
Ashland
Consumer Markets (“Consumer Markets”) markets premium packaged automotive
lubricants, chemicals, appearance products, antifreeze and filters, with sales
in more than 100 countries. Consumer Markets’ Valvoline® trademark
was federally registered in 1873 and is the oldest trademark for lubricating oil
in the United States. Consumer Markets markets the following key
brands of products and services to the private passenger car, light truck and
heavy duty markets: Valvoline lubricants; Valvoline Premium Blue®
commercial lubricants; MaxLife® automotive products for vehicles with 75,000 or
more miles; Valvoline Professional Series® automotive chemicals; Pyroil®
automotive chemicals; Eagle One® automotive appearance products; Car Brite®
automotive reconditioning products; Zerex® antifreeze; Tectyl® industrial
products; and Valvoline Instant Oil Change® automotive services.
Consumer
Markets is comprised of the following businesses:
Do It Yourself (“DIY”) — The
DIY business sells Valvoline® and other branded and private label products to
consumers who perform their own auto maintenance. These products are
sold through retail auto parts stores such as AutoZone and Advance Auto Parts,
mass merchandisers such as Wal-Mart Stores, Inc., and warehouse distributors and
their affiliated jobber stores such as NAPA and CARQUEST.
Installer Channels — The
Installer Channels business sells branded products and services to installers
(such as car dealers, general repair shops and quick lubes) and to auto auctions
through a network of independent distributors and company-owned and operated
“direct market” operations. This business also includes distribution
to quick lubes branded “Valvoline Express Care®,” which consists of 355
independently owned and operated stores.
Valvoline Instant Oil Change
(“VIOC”) — The Valvoline Instant Oil Change® chain is the second
largest competitor in the U.S. “fast oil change” service business, providing
Consumer Markets with a significant presence in the installer channels segment
of the passenger car and light truck motor oil market. As of
September 30, 2009, 259 company-owned and 592 independently-owned and operated
franchise VIOC centers were operating in 40 states. VIOC centers
offer customers an innovative computer-based preventive maintenance tracking
system which allows service technicians to make service recommendations based
primarily on manufacturers’ recommendations.
Commercial & Industrial
(“C&I”) — The C&I business sells branded products and services to
on-highway fleets, construction companies and original equipment manufacturers
(OEMs) through company-owned and operated “direct market” operations, national
accounts and a network of distributors. The C&I business also
maintains a strategic alliance with Cummins Inc. (“Cummins”) to distribute heavy
duty lubricants to the commercial market, as well as smaller alliances with
other global OEMs.
Valvoline International —
Outside of North America, Valvoline International markets Valvoline®, Eagle
One®, Zerex® and other branded products through wholly-owned affiliates, joint
ventures, licensees and independent distributors in
4
more than
100 countries. Valvoline International operates joint ventures with
Cummins in Argentina, Brazil, China and India. In addition, Valvoline
International operates joint ventures with local entities in Ecuador, Thailand
and Venezuela. Valvoline International markets products for both
consumer and commercial vehicles and equipment and is served by company-owned
plants in the United States, Australia and the Netherlands and by toll
manufacturers.
Consumer
Markets operates lubricant blending and packaging plants in Santa Fe Springs,
California; Cincinnati, Ohio; East Rochester, Pennsylvania; and Deer Park, Texas
within the United States and Witherill Park, Australia; and Dordrecht, the
Netherlands. Automotive chemical manufacturing and distribution is
conducted in Hernando, Mississippi. Bulk blending and distribution
facilities are located in College Park, Georgia; Willow Springs, Illinois; and
St. Louis, Missouri within the United States and Mississauga,
Canada. Direct market distribution operations are conducted out of
centers located in Orlando, Florida; College Park, Georgia; Willow Springs,
Illinois; Indianapolis, Indiana; St. Louis, Missouri; Cincinnati, Ohio; East
Rochester, Pennsylvania; Memphis, Tennessee; and Dallas,
Texas. C&I direct market distribution operations are conducted
out of centers located in Orlando, Florida; Willow Springs, Illinois;
Indianapolis, Indiana; Cincinnati, Ohio; East Rochester, Pennsylvania; and
Dallas, Texas.
Additives
(from key suppliers such as The Lubrizol Corporation) and base oils (from key
suppliers such as Motiva Enterprises LLC and SK E&P Company) constitute a
large portion of the raw materials required to manufacture Consumer Markets’
products. In addition to raw materials, Consumer Markets sources a
significant portion of its packaging from key suppliers such as Graham Packaging
Inc. For a discussion of the risks affecting Consumer Markets’
supplier relationships, see “Item 1A. Risk Factors” in this annual report on
Form 10-K.
ASHLAND
DISTRIBUTION
Ashland
Distribution (“Distribution”) distributes chemicals, plastics and composite raw
materials in North America and plastics in Europe and
China. Distribution also provides environmental services, including
hazardous and nonhazardous waste collection, recovery, recycling and disposal,
in North America. Deliveries are made in North America through a
network of owned, leased and third-party warehouses, as well as rail and tank
terminals.
Distribution
operates the following businesses:
Chemicals — The Chemicals
business distributes specialty and industrial chemicals, additives and solvents
to industrial users in North America as well as some export
operations. Markets served include the paint and coatings, personal
care, inks, adhesives, polymer, rubber, industrial and institutional
compounding, automotive, appliance, oil and gas and paper
industries.
Plastics — The Plastics
business offers a broad range of thermoplastic resins, and specialized technical
service to processors in North America as well as some export
operations. Processors include injection molders, extruders, blow
molders and rotational molders. This business provides plastic
material transfer and packaging services and less-than-truckload quantities of
packaged thermoplastics. It also markets a broad range of thermoplastics to
processors in Europe.
Composites — The Composites
business supplies mixed truckload and less-than-truckload quantities of
polyester thermoset resins, fiberglass and other specialty reinforcements,
catalysts and allied products to customers in the cast polymer, corrosion,
marine, building and construction, and other specialty reinforced plastics
industries through distribution facilities located throughout North
America. It also offers Ashland’s own line of resins and gelcoats,
serving the fiber-reinforced plastics and cast-polymer industries.
Environmental Services — The
Environmental Services business, working in cooperation with chemical waste
service companies, provides customers, including major automobile manufacturers,
with comprehensive, nationwide hazardous and nonhazardous waste collection,
recovery, recycling and disposal services. These services are offered
through a North American network of distribution centers, including several
storage facilities that have been fully permitted by the United States
Environmental Protection Agency (“USEPA”).
Distribution
has 57 owned or leased facilities, 62 third-party warehouses, rail terminals and
tank terminals and three locations that perform contract packaging
activities. Distribution of thermoplastic resins in Europe is
conducted in 20 countries primarily through 14 third-party warehouses and one
leased warehouse which also operates as a compounding facility.
Distribution
has significant relationships with suppliers of its products and
services. For a discussion of the risks affecting Distribution’s
supplier relationships, see “Item 1A. Risk Factors” in this annual report on
Form 10-K.
5
MISCELLANEOUS
Environmental
Matters
Ashland
has implemented a companywide environmental policy overseen by the
Environmental, Health and Safety Committee of Ashland’s Board of
Directors. Ashland’s Environmental, Health and Safety (“EH&S”)
department has the responsibility to ensure that Ashland’s businesses worldwide
maintain environmental compliance in accordance with applicable laws and
regulations. This responsibility is carried out via training;
widespread communication of EH&S policies; information and regulatory
updates; formulation of relevant policies, procedures and work practices; design
and implementation of EH&S management systems; internal auditing by an
independent auditing group; monitoring of legislative and regulatory
developments that may affect Ashland’s operations; assistance to the businesses
in identifying compliance issues and opportunities for voluntary actions that go
beyond compliance; and incident response planning and
implementation.
Federal,
state and local laws and regulations relating to the protection of the
environment have a significant impact on how Ashland conducts its
businesses. Ashland’s operations outside the United States are
subject to the environmental laws of the countries in which they are
located. These laws include regulation of air emissions and water
discharges, waste handling, remediation and product inventory, registration and
regulation. New laws and regulations may be enacted or adopted by
various regulatory agencies globally. The costs of compliance with
new rules cannot be estimated until the manner in which they will be implemented
has been more precisely defined.
At
September 30, 2009, Ashland’s reserves for environmental remediation amounted to
$221 million, reflecting 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, judgments and estimates are used,
along with historical experience and other factors, to identify and evaluate
remediation alternatives and their related costs in determining the estimated
reserves for environmental remediation. 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 is approximately $375
million. Ashland does not believe that any current individual
remediation location is material to Ashland, as its largest reserve for any site
is less than 10% of the remediation reserve. Ashland regularly
adjusts its reserves as environmental remediation
continues. Environmental remediation expense, net of insurance
receivables, amounted to $13 million in 2009, compared to $7 million in 2008 and
$7 million in 2007.
Product Control, Registration and
Inventory — Many of Ashland’s products and operations in the United
States are subject to the Toxic Substance Control Act (“TSCA”); the Food, Drug
and Cosmetics Act; the Chemical Diversion and Trafficking Act; the Chemical
Weapons Convention; and other product-related regulations. In
addition, the European Union (“EU”) has implemented an important new regulation,
REACH (Registration, Evaluation and Authorization of Chemicals) which applies to
existing and new chemical substances produced or imported into the EU in
quantities of greater than one ton per year. Ashland has completed
the preregistration of its chemical substances required by REACH. In
addition, in accordance with REACH’s requirements, Ashland is communicating the
intended use of chemical substances in its products to suppliers and
customers. Under REACH additional testing requirements, documentation
and risk assessments will occur and may adversely affect Ashland’s costs of
products produced in or for export to the EU. Other countries have
similar laws and regulations relating to product control, registration and
inventory.
Remediation — Ashland
currently operates, and in the past has operated, various facilities where,
during the normal course of business, releases of hazardous substances have
occurred. Additionally, Ashland has known or alleged potential
environmental liabilities at a number of third-party sites for which Ashland has
financial responsibility. Federal and state laws, including but not
limited to the Resource Conservation and Recovery Act (“RCRA”), the
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)
of 1980 and various other remediation laws, require that contamination caused by
such releases be assessed and, if necessary, remediated to meet applicable
standards. Some of these laws also provide for liability for related
damage to natural resources, and claims for alleged property and personal injury
damage can also arise related to contaminated sites. Laws in other
jurisdictions where Ashland operates require that contamination caused by such
releases at these sites be assessed and, if necessary, remediated to meet
applicable standards.
Air — In the United States,
the Clean Air Act (the “CAA”) imposes stringent limits on facility air
emissions, establishes a federally mandated operating permit program, allows for
civil and criminal enforcement actions and sets limits on the volatile or toxic
content of many types of industrial and consumer
products. Additionally, it establishes air quality attainment
deadlines and control requirements based on the severity of air pollution in a
given geographical area. Various
6
state
clean air acts implement, complement and, in many instances, add to the
requirements of the federal CAA. The requirements of the CAA and its
state counterparts have a significant impact on the daily operation of Ashland’s
businesses and, in many cases, on product formulation and other long-term
business decisions. Other countries where Ashland operates also have
laws and regulations relating to air quality. Ashland’s businesses
maintain numerous permits pursuant to these clean air laws.
State and
local air agencies in the United States are still implementing strategies for
meeting ozone and particulate matters standards established by the USEPA in
1997. Ozone strategies have included emission controls for certain
types of emission sources, reduced limits on the volatile organic compound
content of industrial and consumer products and many requirements on the
transportation sector. Particulate matter strategies have included
dust control measures for construction sites and reductions in emission rates
allowed for industrial operations. In 2006 and 2008, the USEPA
established newer and more stringent standards for particulate matter and ozone,
respectively. State and local agencies are evaluating options for
meeting these newest standards which will begin to be implemented between 2010
and 2013. It is not possible at this time to estimate any potential
financial impact that these newest standards may have on Ashland’s operations or
products. Ashland will continue to monitor and evaluate the standards
proposed to meet these and all air quality standards.
Solid Waste — Ashland’s
businesses are subject to various laws relating to and establishing standards
for the management of hazardous and solid waste. In the United
States, RCRA applies. While many U.S. facilities are subject to the
RCRA rules governing generators of hazardous waste, certain facilities are also
required to have hazardous waste storage permits. Ashland has
implemented systems to oversee compliance with the RCRA regulations and, where
applicable, permit conditions. In addition to regulating current
waste disposal practices, RCRA also addresses the environmental effects of
certain past waste disposal operations, the recycling of wastes and the storage
of regulated substances in underground tanks. Other countries where
Ashland operates also have laws and regulations relating to hazardous and solid
waste.
Climate Change — Ashland has
been collecting energy use data and calculating greenhouse gas (“GHG”) emissions
for several years and is evaluating the potential risks from climate change to
facilities, products, and other business interests, and the strategies to
respond to those risks. In light of the uncertainty of these risks
and any related opportunities, as well as the evolving nature of legislative and
regulatory efforts in the U.S. and around the world, Ashland cannot predict
whether GHG-related developments will affect its operations or financial
condition.
Water — Ashland’s businesses
maintain numerous discharge permits. In the United States, such
permits may be required by the National Pollutant Discharge Elimination System
of the Clean Water Act and similar state programs. Other countries
have similar laws and regulations requiring permits and controls relating to
water discharge.
Competition
Functional
Ingredients, Water Technologies and Performance Materials compete in the highly
fragmented specialty chemicals industry. The participants in the
industry offer a varied and broad array of product lines designed to meet
specific customer requirements. Participants compete with individual
and service product offerings on a global, regional and/or local level subject
to the nature of the businesses and products, as well as the end-markets and
customers served. The industry has become increasingly global as
participants focus on establishing and maintaining leadership positions outside
of their home markets. Many of these segments’ product lines face
domestic and international competitive factors, including industry
consolidation, pricing pressures and competing technologies.
Consumer
Markets competes in the highly competitive automotive lubricants and consumer
products car care businesses, principally through its offerings of premium
products and services primarily under the Valvoline® family of trademarks,
coupled with strong brand marketing, customer support, and distribution
capabilities. Some of the major brands of motor oils and lubricants
with which Consumer Markets competes globally are Castrol®, Mobil® and
Pennzoil®. In the “fast oil change” business, Consumer Markets
competes with other leading independent fast lube chains on a national, regional
or local basis, as well as automobile dealers and service
stations. Important competitive factors for Consumer Markets in the
“fast oil change” market include Valvoline’s brand recognition; maintaining
market presence through Valvoline Instant Oil Change® and Valvoline Express
Care® outlets; and quality and speed of service, location, convenience and sales
promotions.
Distribution
competes with national, regional and local companies throughout North
America. The Plastics business also competes with other distribution
companies in Europe and China. Competition within each of
Distribution’s businesses is based primarily on reliable and timely supply of
products, breadth of product portfolio, service offerings and
price.
7
Research
Ashland
conducts a program of market-focused research and development to understand the
needs of the marketplace, to frame those needs in a platform in which Ashland
has capability to deliver, and to determine how to develop or access the
intellectual property required to meet the identified market
needs. Research and development costs are expensed as they are
incurred and totaled $96 million in 2009, ($48 million in 2008 and $45 million
in 2007), including expenses incurred by Hercules.
Forward-Looking
Statements
This
annual report on Form 10-K 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. Words such as “anticipates,”
“believes,” “estimates,” “expects,” “is likely,” “predicts,” and variations of
such words and similar expressions are intended to identify such forward-looking
statements. Although Ashland believes that its expectations are based
on reasonable assumptions, it cannot assure that the expectations contained in
such statements will be achieved. Important factors that could cause
actual results to differ materially from those contained in such statements are
discussed under “Risk and Uncertainties” in Note A of “Notes to Consolidated
Financial Statements” in this annual report on Form 10-K. For a
discussion of other factors and risks affecting Ashland’s operations, see “Item
1A. Risk Factors” in this annual report on Form 10-K.
ITEM
1A. RISK FACTORS
The
following discussion of “risk factors” identifies the most significant factors
that may adversely affect Ashland’s business, operations, financial position or
future financial performance. This information should be read in
conjunction with Management’s Discussion and Analysis and the consolidated
financial statements and related notes incorporated by reference into this
annual report on Form 10-K. The following discussion of risks is
designed to highlight what Ashland believes are important factors to consider
when evaluating its expectations. These factors could cause future
results to differ from those in forward-looking statements and from historical
trends.
Several
of Ashland’s businesses are cyclical in nature, and economic downturns or
declines in demand, particularly for certain durable goods, may negatively
impact its revenues and profitability.
Ashland’s
revenues and profitability are susceptible to downturns in the economy,
particularly in those segments serving the housing, construction, automotive,
paper and marine industries. Both overall demand for Ashland’s
products and services and its profitability are affected by economic recession,
inflation, changes in prices of hydrocarbon (and its derivatives) and other raw
materials or changes in governmental monetary or fiscal
policies. During the economic downturn, a number of Ashland’s
customers in the construction, automotive, paper and certain other industries
are experiencing financial and production stresses, which has led to decreased
demand for Ashland’s products and has affected Ashland’s margins on products
sold. While Ashland strives to reduce costs to help offset the
effects of this decreased demand, there is no assurance Ashland will be able to
manage costs in light of any further demand decreases. If the
economic downturn intensifies or there is a further decline in customer demand,
Ashland’s business, results of operations and financial condition could be
negatively impacted.
Ashland
is undergoing a strategic transformation which introduces uncertainties
regarding its business, financial condition and results of
operations.
Ashland’s strategic objective has been to create a more focused
company built around a strong core of specialty chemicals
businesses. Ashland intends to invest in and to grow its specialty
chemicals businesses, operating its other businesses to generate strong cash
flows to fund this investment. As a result, Ashland is currently in a
transformational period in which it has made and may continue to make changes
that could be material to its business, financial condition and results of
operations. Over the past five years, changes have included the
disposition of Ashland’s refining and marketing and highway construction
businesses and the acquisition of Hercules.
In addition,
because Ashland’s businesses differed from Hercules’ businesses, the
results of operations of the combined company may be affected by factors
different from those affecting Ashland prior to the
Hercules Transaction, and the realization of the full benefits
anticipated from the Hercules Transaction may not be achieved. It is difficult to predict
the impact of any future changes on Ashland’s business, financial condition or
results of operations.
8
The
competitive nature of Ashland’s markets may delay or prevent the Company from
passing increases in raw materials costs on to its customers. In
addition, certain of Ashland’s suppliers may be unable to deliver products or
raw materials or may withdraw from contractual arrangements. The
occurrence of either event could adversely affect Ashland’s results of
operations.
Rising
and volatile raw material prices, especially those of hydrocarbon derivatives,
may negatively impact Ashland’s costs. Ashland is not always able to
raise prices in response to such increased costs, and its ability to pass on the
costs of such price increases is dependent upon market
conditions. Likewise, Ashland purchases certain products and raw
materials from suppliers, often pursuant to written supply
contracts. If those suppliers are unable to timely meet Ashland’s
orders or choose to terminate or otherwise avoid contractual arrangements,
Ashland may not be able to make alternative supply arrangements. If
Ashland is unable to obtain and retain qualified suppliers under commercially
acceptable terms, its ability to manufacture and deliver products in a timely,
competitive and profitable manner could be adversely affected.
Ashland’s
substantial indebtedness may impair its financial condition and prevent it from
fulfilling its obligations under the debt instruments.
As a
result of the Hercules Transaction, Ashland has incurred a substantial amount of
debt. Ashland’s substantial indebtedness could have important
consequences including:
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limiting
Ashland’s ability to borrow additional amounts to fund working capital,
capital expenditures, acquisitions, debt service requirements, execution
of its growth strategy and other
purposes;
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requiring
Ashland to dedicate a substantial portion of its cash flow from operations
to pay interest on its debt, which would reduce availability of Ashland’s
cash flow to fund working capital, capital expenditures, acquisitions,
execution of its growth strategy and other general corporate
purposes;
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making
Ashland more vulnerable to adverse changes in general economic, industry
and government regulations and in its business by limiting its flexibility
in planning for, and making it more difficult for Ashland to react quickly
to, changing conditions;
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placing
Ashland at a competitive disadvantage compared with those of its
competitors that have less debt;
and
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exposing
Ashland to risks inherent in interest rate fluctuations because some of
its borrowings will be at variable rates of interest, which could result
in higher interest expense in the event of increases in interest
rates.
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In
addition, Ashland may not be able to generate sufficient cash flow from its
operations to repay its indebtedness when it becomes due and to meet its other
cash needs. If Ashland is not able to pay its debts as they become
due, Ashland will be required to pursue one or more alternative strategies, such
as selling assets, refinancing or restructuring its indebtedness or selling
additional debt or equity securities. Ashland may not be able to
refinance its debt or sell additional debt or equity securities or its assets on
favorable terms, if at all, and if Ashland must sell its assets, such sales may
negatively affect its ability to generate revenues.
Ashland’s
restrictive debt covenants may affect its ability to operate its business
successfully.
The terms
of Ashland’s credit facilities and senior unsecured notes contain various
provisions that limit its ability to, among other things: grant
liens; incur additional indebtedness, guarantees or other contingent
obligations; engage in mergers and consolidations; sell, transfer and otherwise
dispose of property and assets; make loans, acquisitions, joint ventures and
other investments; declare dividends, make distributions or redeem or repurchase
capital stock; change the nature of Ashland’s business; and enter into
transactions with its affiliates. These covenants could adversely
affect Ashland’s ability to finance its future operations or capital needs and
pursue available business opportunities.
In
addition, Ashland’s credit facilities require it to maintain specified financial
ratios and satisfy certain financial condition tests. Events beyond
Ashland’s control, including changes in general economic and business
conditions, may affect its ability to meet those financial ratios and financial
condition tests. Ashland cannot assure that it will meet those tests
or that the lenders will waive any failure to meet those tests. A
breach of any of these covenants or any other restrictive covenants contained in
Ashland’s credit facilities or senior unsecured notes would result in an event
of default.
If an
event of default under Ashland’s credit facilities occurs, the holders of the
affected indebtedness could declare all amounts outstanding, together with
accrued interest, to be immediately due and payable, which, in turn, could cause
the default and acceleration of the maturity of certain of Ashland’s other
indebtedness. If Ashland was unable to pay such amounts, the lenders
under its credit facilities could proceed against the collateral pledged to
them. Ashland has pledged a substantial portion of its assets to the
lenders under its credit facilities. If an event of default occurs
under the senior unsecured notes, the Trustee under the notes or holders of at
least 25% of the outstanding aggregate principal amount of notes may declare the
principal of the notes and any accrued interest immediately payable, which, in
turn, could cause the default and acceleration of the maturity of certain of
Ashland’s other indebtedness.
9
Ashland’s
pension and post-retirement benefit plan obligations are currently underfunded,
and Ashland may have to make significant cash payments to some or all of these
plans, which would reduce the cash available for Ashland’s
businesses.
Ashland
has unfunded obligations under its domestic and foreign pension and
post-retirement benefit plans. The funded status of Ashland’s pension
plans is dependent upon many factors, including returns on invested assets, the
level of certain market interest rates and the discount rate used to determine
pension obligations. Unfavorable returns on the plan assets or
unfavorable changes in applicable laws or regulations could materially change
the timing and amount of required plan funding, which would reduce the cash
available for Ashland’s businesses. In addition, a decrease in the
discount rate used to determine pension obligations could result in an increase
in the valuation of pension obligations, which could affect the reported funding
status of Ashland’s pension plans and future contributions, as well as the
periodic pension cost in subsequent fiscal years.
Under the
Employee Retirement Income Security Act of 1974, as amended, or ERISA, the
Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an
underfunded tax-qualified pension plan under limited
circumstances. In the event Ashland’s tax-qualified pension plans are
terminated by the PBGC, Ashland could be liable to the PBGC for some portion of
the underfunded amount and, under certain circumstances, the liability could be
senior to Ashland’s senior unsecured notes.
Ashland
is responsible for, and has financial exposure to, liabilities from pending and
threatened claims, including those alleging personal injury caused by exposure
to asbestos, which reduce Ashland’s cash flows and could reduce
profitability.
There are
various claims, lawsuits and administrative proceedings pending or threatened,
including those alleging personal injury caused by exposure to asbestos, against
Ashland and its current and former subsidiaries. Such actions are
with respect to commercial matters, product liability, toxic tort liability and
other matters which seek remedies or damages, some of which are for substantial
amounts. While these actions are being contested, their outcome is
not predictable. Ashland’s businesses could be materially and adversely affected
by financial exposure to these liabilities.
Ashland’s
implementation of its SAP® enterprise resource planning (“ERP”) project in the
business units acquired as part of the Hercules Transaction has the potential
for business interruption and associated adverse impact on operating results as
well as internal controls.
Ashland
is proceeding with a project to implement its ERP system within the business
units acquired as part of the Hercules Transaction during fiscal
2010. Extensive planning is underway to support the effective
implementation of the ERP system in those business units; however, such
implementations carry certain risks, including potential for business
interruption with the associated adverse impact on operating
income. In addition, internal controls that are modified or
redesigned to support the ERP system implemented in those business units may
result in deficiencies in the future that could constitute significant
deficiencies, or in the aggregate, a material weakness in internal control over
financial reporting.
Ashland’s
success depends upon its ability to attract and retain key employees and the
succession of senior management.
Ashland’s
success depends on its ability to attract and retain key personnel, and Ashland
relies heavily on its management team. The inability to recruit and
retain key personnel or the unexpected loss of key personnel may adversely
affect Ashland’s operations. Retention of senior personnel and
appropriate succession planning will continue to be critical to the successful
implementation of Ashland’s strategies.
Ashland
has incurred, and may continue to incur, substantial operating costs and capital
expenditures as a result of environmental, health and safety liabilities and
requirements, which could reduce Ashland’s profitability.
Ashland
is subject to various U.S. and foreign laws and regulations relating to
environmental protection and worker health and safety. These laws and
regulations regulate discharges of pollutants into the air and water, the
management and disposal of hazardous substances and the cleanup of contaminated
properties. The costs of complying with these laws and regulations
can be substantial and may increase as applicable requirements and their
enforcement become more stringent and new rules are implemented. If
Ashland violates the requirements of these laws and regulations, it may be
forced to pay substantial fines, to complete additional costly projects or to
modify or curtail its operations to limit contaminant emissions.
Ashland
has financial exposure to substantially all of Ashland’s environmental and other
liabilities and substantially all of the environmental and other liabilities of
its subsidiaries including Hercules and its former
subsidiaries. Ashland has investigated and remediated a number of its
current and former properties. Engineering studies, 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. Environmental remediation reserves are
subject to numerous inherent uncertainties
10
that
affect Ashland’s ability to estimate its share of the applicable
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. As a result, Ashland’s ultimate costs could exceed its
reserves.
Ashland’s
facilities are subject to operating hazards, which may disrupt its
business.
Ashland
is dependent upon the continued safe operation of its production, storage and
distribution facilities. Ashland’s facilities are subject to hazards
associated with the manufacture, handling, storage and transportation of
chemical materials and products, including leaks and ruptures, explosions,
fires, inclement weather and natural disasters, unexpected utility disruptions
or outages, unscheduled downtime and environmental hazards. Ashland
may have incidents that may temporarily shut down or otherwise disrupt its
facilities, causing production delays and resulting in liability for workplace
injuries and fatalities. Ashland cannot assure that it will not experience these
types of incidents in the future or that these incidents will not result in
production delays or otherwise have a material adverse effect on Ashland’s
business, financial condition or results of operations.
Ashland’s
business could be adversely affected by the occurrence of a catastrophe,
including a natural or man-made disaster.
The
occurrence of any pandemic disease, natural disaster or terrorist attacks or any
catastrophic event that results in Ashland’s workforce being unable to be
physically located at one of its facilities could result in lengthy disruption
of Ashland’s business operations. In addition, any of these events
could have severe negative effects on the global economic
environment.
Provisions
of Ashland’s articles of incorporation and by-laws and Kentucky law could deter
takeover attempts and adversely affect Ashland’s stock price.
Provisions
of Ashland’s articles of incorporation and by-laws could make acquiring control
of Ashland without the support of its Board of Directors difficult for a third
party, even if the change of control might be beneficial to Ashland
shareholders. Ashland’s articles of incorporation and by-laws
contain:
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provisions
relating to the classification, nomination and removal of its
directors;
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provisions
limiting the right of shareholders to call special meetings of its Board
of Directors and shareholders;
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provisions
regulating the ability of its shareholders to bring matters for action at
annual meetings of its shareholders;
and
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an
authorization to its Board of Directors to issue and set the terms of
preferred stock.
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Ashland’s
articles of incorporation and the laws of Kentucky impose some restrictions on
mergers and other business combinations between Ashland and any beneficial owner
of 10% or more of the voting power of its outstanding common
stock. The existence of these provisions may deprive shareholders of
any opportunity to sell their shares at a premium over the prevailing market
price for Ashland Common Stock. The potential inability of Ashland
shareholders to obtain a control premium could adversely affect the market price
for Ashland Common Stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Ashland’s
corporate headquarters, which is leased, is located in Covington,
Kentucky. Principal offices of other major operations are located in
Wilmington, Delaware (Functional Ingredients and Water Technologies); Dublin,
Ohio (Performance Materials and Distribution); Lexington, Kentucky (Consumer
Markets); Barendrecht, the Netherlands; Shanghai, China and Schaffhausen,
Switzerland. All of these offices are leased, except for portions of
the Dublin, Ohio facilities which are owned. Principal manufacturing,
marketing and other materially important physical properties of Ashland and its
subsidiaries are described under the appropriate segment under “Item 1” in this
annual report on Form 10-K. Additional information concerning certain
leases may be found in Note K of “Notes to Consolidated Financial Statements” in
this annual report on Form 10-K.
11
ITEM
3. LEGAL PROCEEDINGS
The
following is a description of Ashland’s material legal proceedings.
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 Stoker Corporation (“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.
Hercules,
a wholly-owned subsidiary of Ashland, is also subject to liabilities from
asbestos-related personal injury lawsuits involving claims which typically arise
from alleged exposure to asbestos fibers from resin encapsulated pipe and tank
products which were sold by one of the Hercules’ former subsidiaries to a
limited industrial market.
Ashland
and Hercules are also defendants in lawsuits alleging exposure to asbestos at
facilities formerly or presently owned or operated by Ashland or
Hercules.
For
additional information regarding liabilities arising from asbestos-related
litigation, see “Management’s Discussion and Analysis – Application of Critical
Accounting Policies – Asbestos-related litigation” and Note P of
“Notes to Consolidated Financial Statements” in this annual report on Form
10-K.
Environmental
Proceedings
(1) CERCLA and Similar State Law Sites
– Under CERCLA and similar state laws, Ashland and
Hercules may be subject to joint and several liability for clean-up costs in
connection with alleged releases of hazardous substances at sites where it has
been identified as a “potentially responsible party” (“PRP”). As of
September 30, 2009, Ashland and Hercules have been identified as a PRP by U.S.
federal and state authorities, or by private parties seeking contribution, for
the cost of environmental investigation and/or cleanup at 94 waste treatment or
disposal sites. These sites are currently subject to ongoing
investigation and remedial activities, overseen by the USEPA or a state agency,
in which Ashland or Hercules is typically participating as a member of a PRP
group. Generally, the type of relief sought includes remediation of
contaminated soil and/or groundwater, reimbursement for past costs of site
clean-up and administrative oversight and/or long-term monitoring of
environmental conditions at the sites. The ultimate costs are not
predictable with assurance.
(2) Multi-Media
Environmental Compliance Investigation – In April 2005, Hercules’ Franklin, Virginia
manufacturing facilities were subject to a multi-media environmental compliance
investigation by the USEPA and the Virginia Department of Environmental Quality
(“VADEQ”), and in April 2007, Hercules’ Hopewell, Virginia manufacturing
facilities were subject to a CAA compliance investigation by USEPA and the
VADEQ. In April 2008, the results of both investigations were
provided to Hercules which uncovered areas of potential noncompliance with
various environmental requirements which are being evaluated. At this
time, the potential liability, if any, with respect to these matters should not
be material to Ashland.
(3) Naval Weapons Industrial Reserve
Plant – The Naval Weapons Industrial Reserve Plant in McGregor,
Texas (the “Site”), is a government-owned facility which was operated by various
contractors on behalf of the U.S. Department of the Navy (the “Navy”) from 1942
to 1995. Hercules operated the Site from 1978 to 1995. The
U.S. Department of Justice, on behalf of the Navy, has advised Hercules and
other former contractors that, pursuant to CERCLA, the Government has incurred
costs of over $50 million with respect to certain environmental liabilities
which the Government alleges are attributable, at least in part, to Hercules’
and the other former contractors’ past operation of the
Site. Hercules and the other former contractors have executed a
tolling agreement with the Government and have been engaged in discussions with
the Government concerning the Site. The investigation undertaken to date indicates that
there may be substantial defenses to the Government’s claims. At this
time, the potential liability, if any, with respect to this Site should not be
material to Ashland.
For
additional information regarding environmental matters and reserves, see
“Management’s Discussion and Analysis – Application of Critical Accounting
Policies – Environmental Remediation” and Note P of “Notes to Consolidated
Financial Statements” in this annual report on Form 10-K.
Other
Pending Legal Proceedings
In
addition to the matters described, there are various claims, lawsuits and
administrative proceedings pending or threatened against Ashland and its current
and former subsidiaries. Such actions are with respect 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.
12
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended September 30,
2009.
ITEM
X. EXECUTIVE OFFICERS OF ASHLAND
The
following is a list of Ashland’s executive officers, their ages and their
positions and offices during the last five years (listed alphabetically after
the Chief Executive Officer as to current members of Ashland’s Executive
Committee and other executive officers).
JAMES J. O’BRIEN
(age 55) is Chairman of the Board, Chief Executive Officer and a Director
of Ashland and has served in such capacities since 2002.
LAMAR M. CHAMBERS
(age 55) is Senior Vice President and Chief Financial Officer of Ashland
and has served in such capacities since 2008. During the past five
years, he has also served as Vice President and Controller of
Ashland.
DAVID L. HAUSRATH (age 57) is Senior Vice
President and General Counsel of Ashland and has served in such capacities since
2004 and 1999, respectively. During the past five years, he has also
served as Secretary of Ashland.
ROBERT M.
CRAYCRAFT, II (age 40) is Vice President of Ashland and President of
Distribution and has served in such capacities since 2008. During the
past five years, he has also served as Vice President-U.S. Chemicals of
Distribution and Senior Vice President and General Manager-Retail Business and
Vice President-Business Transformation of Consumer Markets.
SUSAN B. ESLER (age 48) is Vice President, Human Resources and
Communications of Ashland and has served in such capacity since
2006. During the past five years, she has also served as Vice
President - Human Resources of Ashland.
THEODORE L. HARRIS (age 44) is Vice President of
Ashland; President, Global Supply Chain and Environmental, Health and Safety;
and President of Performance Materials and has served in such capacities since
2006, 2008 and July 2009, respectively. During the past five years,
he has also served as Vice President of Information Technology, President of
Distribution and Vice President and General Manager of the Composite Polymers
Division of Ashland.
J. WILLIAM HEITMAN
(age 55) is Vice President and Controller of Ashland and has served in
such capacities since 2008. During the past five years, he has also
served as Controller of the North American Operations of The Goodyear Tire &
Rubber Company.
SAMUEL J. MITCHELL,
JR. (age 48) is Vice President of
Ashland and President of Consumer Markets and has served in such capacities
since 2002.
JOHN E.
PANICHELLA (age 50) is Vice President of Ashland and President of Functional
Ingredients and has served in such capacities since 2008. During the
past five years, he has also served as Vice President and President-Aqualon
Division of Hercules and Vice President and General Manager-Americas of General
Electric Water & Process Technologies.
PAUL C.
RAYMOND, III (age 47) is Vice President of Ashland and President of Water
Technologies and has served in such capacities since 2008. During the
past five years, he has also served as Vice President, President-Paper
Technologies and Ventures Division and President-Pulp and Paper Division of
Hercules and Vice President and General Manager of Honeywell Electronic
Materials.
ANNE T.
SCHUMANN (age 49) is Vice President and Chief Information and Administrative
Services Officer of Ashland and has served in such capacities since 2008 and
August 2009, respectively. During the past five years, she has also
served as Vice President, Acquisition Integration of Ashland and Vice President,
Information Technology and Human Resources and Vice President, Shared Services
Center of Hercules.
WALTER H. SOLOMON (age 49) is Vice President and
Chief Growth Officer of Ashland and has served in such capacities since
2005. During the past five years, he has also served as Senior Vice
President and General Manager-Retail Business of Valvoline.
13
Each
executive officer is elected by the Board of Directors of Ashland to a term of
one year, or until a successor is duly elected, at the annual meeting of the
Board of Directors, except in those instances where the officer is elected other
than at an annual meeting of the Board of Directors, in which case his or her
tenure will expire at the next annual meeting of the Board of Directors unless
the officer is re-elected.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
See
Quarterly Financial Information on page F-48 for information relating to market
price and dividends of Ashland’s Common Stock.
At
October 30, 2009, there were approximately 19,300 holders of record of Ashland’s
Common Stock. Ashland Common Stock is listed on the New York Stock
Exchange (ticker symbol ASH) and has trading privileges on NASDAQ and the
Chicago and National stock exchanges.
There
were no sales of unregistered securities required to be reported under Item 701
of Regulation S-K and Ashland made no purchases of Ashland Common Stock during
the fourth quarter of fiscal 2009.
14
PERFORMANCE
GRAPH
The
following graph compares Ashland’s five-year cumulative total shareholder return
with the cumulative total return of Standard & Poor’s 500 Index, Standard
& Poor’s 400 Midcap Index, and a peer group of companies. Ashland
was listed in the S&P 500 Index until November 2008 and is now listed in the
S&P 400 Midcap Index. The cumulative total shareholder return for
each of these groups assumes the reinvestment of dividends.
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN
ASHLAND,
S&P 500 INDEX, S&P 400 MIDCAP INDEX, AND PEER GROUP
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
|
Ashland
1
|
100
|
122
|
143
|
157
|
78
|
118
|
|
S&P
500
|
100
|
112
|
124
|
145
|
113
|
105
|
|
S&P
400 Midcap
|
100
|
122
|
130
|
154
|
129
|
125
|
|
Peer Group 2
|
100
|
171
|
183
|
229
|
211
|
239
|
|
1
|
Ashland’s
former Petroleum Refining and Marketing operations consisted primarily of
its 38% interest in Marathon Ashland Petroleum LLC which was transferred
on June 30, 2005, along with two other businesses, to Marathon Oil
Corporation. Ashland’s former Transportation Construction
operations consisted of Ashland Paving And Construction, Inc. which was
sold on August 28, 2006, to Oldcastle Materials,
Inc.
|
|
2
|
Ashland’s
Peer Group five-year cumulative total return index reflects Petroleum
Refining and Marketing peers for fiscal 2005 and Transportation and
Construction peers for fiscal 2005
and 2006.
|
The peer
group consists of the following industry indices:
|
|
∙
|
Specialty Chemical Production,
Distribution, and Motor Oil and Car Care Products
Portfolio: Standard & Poor’s 500 Specialty Chemicals
(Large-Cap), Standard & Poor’s 400 Specialty Chemicals (Mid-Cap),
Standard & Poor’s 600 Specialty Chemicals (Small-Cap), and Standard
& Poor’s 400 Diversified Chemicals
(Mid-Cap).
|
|
|
∙
|
Highway Construction
Portfolio, for fiscal 2005 and 2006 only: Standard &
Poor’s 500 Construction Materials (Large-Cap), Standard & Poor’s 400
Construction Materials (Mid-Cap), and Standard & Poor’s 600
Construction Materials (Small-Cap).
|
15
|
|
∙
|
Petroleum Refining and
Marketing Portfolio, for fiscal 2005 only: Standard
& Poor’s 500 Oil & Gas Refining & Marketing &
Transportation (Large-Cap), Standard & Poor’s 400 Oil & Gas
Refining & Marketing & Transportation (Mid-Cap), and Standard
& Poor’s 600 Oil & Gas Refining & Marketing &
Transportation (Small-Cap).
|
As of
September 30, 2009, the aforementioned indices consisted of 33
companies. The annual returns for the companies or indices in each of
the portfolios have been weighted by their respective beginning-of-year market
capitalization. Each portfolio is then weighted to reflect Ashland’s
annual invested capital in each of these lines of business with the annual
return for the peer group represented by the sum of these weighted
portfolios.
ITEM
6. SELECTED FINANCIAL DATA
See
Five-Year Selected Financial Information on page F-49.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See
Management’s Discussion and Analysis of Financial Condition and Results of
Operations on pages M-1 through M-26.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
See
Quantitative and Qualitative Disclosures about Market Risk on page
M-26.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
consolidated financial statements and financial schedule of Ashland presented in
this annual report on Form 10-K are listed in the index on page
F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
As
disclosed in Ashland’s current reports on Forms 8-K and 8-K/A filed on August
29, 2008, September 8, 2008 and December 1, 2008, Ashland changed its
independent registered public accountants effective for the fiscal year ended
September 30, 2009. There were no disagreements or reportable events
related to the change in accountants.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
— As of September 30, 2009, Ashland, under the supervision and with the
participation of Ashland’s management, including Ashland’s Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of Ashland’s
disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures were effective as of September 30, 2009.
Internal Control — See
Management’s Report on Internal Control Over Financial Reporting on page F-2 and
the Report of Independent Registered Public Accounting Firm on page F-3 and
F-4.
Changes in Internal Control Over
Financial Reporting — There has been no change in Ashland’s internal
control over financial reporting during the quarter ended September 30, 2009,
that has materially affected, or is reasonably likely to materially affect,
Ashland’s internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
16
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
There is
hereby incorporated by reference the information to appear under the captions
“Election of Directors” and “Miscellaneous - Section 16(a) Beneficial Ownership
Reporting Compliance” in Ashland’s Proxy Statement, which will be filed with the
SEC within 120 days after September 30, 2009. See also the list of
Ashland’s executive officers and related information under “Executive Officers
of Ashland” in Part I - Item X in this annual report on Form
10-K.
There is
hereby incorporated by reference the information to appear under the caption
“Corporate Governance - Governance Principles” in Ashland’s Proxy
Statement.
There is
hereby incorporated by reference the information to appear under the caption
“Corporate Governance - Shareholder Recommendations for Directors” in Ashland’s
Proxy Statement.
There is hereby
incorporated by reference the information to appear under the caption “Audit
Committee Report” regarding Ashland’s audit committee and audit committee
financial experts, as defined under Item 407(d)(4) and (5) of Regulation S-K of
the Securities Exchange Act of 1934, as amended, in Ashland’s Proxy
Statement.
ITEM
11. EXECUTIVE COMPENSATION
There is
hereby incorporated by reference the information to appear under the captions
“Compensation of Directors,” “Committees and Meetings of the Board of Directors
- Personnel and Compensation Committee Interlocks and Insider Participation,”
“Executive Compensation,” “Compensation Discussion and Analysis,” and “Personnel
and Compensation Committee Report on Executive Compensation” in Ashland’s Proxy
Statement.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
There is
hereby incorporated by reference the information to appear under the captions
“Ashland Common Stock Ownership of Certain Beneficial Owners” and “Ashland
Common Stock Ownership of Directors and Executive Officers of Ashland” in
Ashland’s Proxy Statement.
The
following table summarizes the equity compensation plans under which Ashland
Common Stock may be issued as of September 30, 2009. Except as
disclosed in the narrative to the table, all plans were approved by shareholders
of Ashland.
|
Equity
Compensation Plan Information
|
||||||||||||
|
Plan
Category
|
Number
of securities
to
be issued upon
exercise
of
outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in column (a))
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
compensation plans
approved by
security holders
|
2,541,657 | (1) | $ | 17.14 | (2) | 1,559,342 | (3) | |||||
|
Equity
compensation plans
not
approved by security
holders
|
110,944 | (4) | 880,041 | (5) |
|
Total
|
2,652,601 | $ | 17.14 | (2) | 2,439,383 |
|
(1)
|
This
figure includes (a) 37,542 stock options outstanding under the Ashland
Inc. 1997 Stock Incentive Plan, (b) 473,642 stock options outstanding
under the Amended and Restated Ashland Inc. Incentive Plan (the “Amended
Plan”), (c) 108,366 stock options outstanding under the Hercules
Incorporated Amended and Restated Long Term Incentive Compensation Plan,
and (d) 32,406 stock options outstanding under the Hercules Incorporated
Omnibus Equity Compensation Plan for Non-Employee
Directors. This figure also includes 59,538 net shares that
could be issued under stock-settled SARs under the Amended Plan and
985,656 net shares that could be issued under stock-settled SARs under the
2006 Ashland Inc. Incentive Plan (the “2006 Plan”), based upon the closing
price of Ashland Common Stock on the New York Stock Exchange Composite
Tape on September 30, 2009 ($43.22). Additionally, this figure
includes
|
17
|
|
251,943
restricted stock shares granted under the Amended Plan and deferred,
114,065 performance share units for the 2007-2009 performance period,
102,268 performance share units for the 2008-2010 performance period and
276,058 performance share units for the 2009-2011 performance period,
payable in stock under the 2006 Plan, estimated assuming target
performance is achieved. Also included in the figure are 100,173 shares to
be issued under the pre-2005 Deferred Compensation Plan for Employees,
payable in stock upon termination of employment with
Ashland.
|
|
(2)
|
The
weighted-average exercise price excludes shares in Ashland Common Stock
which may be distributed under the deferred compensation plans and the
deferred restricted stock and performance share units which may be
distributed under the Amended Plan and 2006 Plan as described in footnotes
(1) and (4) in this table.
|
|
(3)
|
This
figure includes 1,072,890 shares available for issuance under the 2006
Plan, 149,152 shares available for issuance under the pre-2005 Deferred
Compensation Plan for Employees and 337,300 shares available for issuance
under the pre-2005 Deferred Compensation Plan for Non-Employee
Directors.
|
|
(4)
|
This
figure includes 88,926 shares to be issued under the Deferred Compensation
Plan for Employees (2005) and 22,018 shares to be issued under the
Deferred Compensation Plan for Non-Employee Directors (2005), payable in
stock upon termination of employment or service with Ashland. Because
these plans are not equity compensation plans as defined by the rules of
the New York Stock Exchange (“NYSE”), neither plan required approval by
Ashland’s shareholders.
|
|
(5)
|
This
figure includes 403,599 shares available for issuance under the Deferred
Compensation Plan for Employees (2005) and 476,442 shares available for
issuance under the Deferred Compensation Plan for Non-Employee Directors
(2005). Because these plans are not equity compensation plans
as defined by the rules of the NYSE, neither plan required approval by
Ashland’s shareholders.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
There is
hereby incorporated by reference the information to appear under the captions
“Corporate Governance - Director Independence and Certain Relationships,” and
“Related Person Transaction Policy,” and “Audit Committee Report” in Ashland’s
Proxy Statement.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
There is
hereby incorporated by reference the information with respect to principal
accountant fees and services to appear under the captions “Audit Committee
Report” and “Ratification of Independent Registered Public Accountants” in
Ashland’s Proxy Statement.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this Report
(1) and
(2) Financial Statements and Financial Schedule
(3) See
Item 15(b) in this annual report on Form 10-K
The
consolidated financial statements and financial schedule of Ashland presented in
this annual report on Form 10-K are listed in the index on page
F-1.
Schedules
other than that listed have been omitted because of the absence of the
conditions under which they are required or because the information required is
shown in the consolidated financial statements or the notes
thereto. Separate financial statements of unconsolidated affiliates
are omitted because each company does not constitute a significant subsidiary
using the 20% tests when considered individually. Summarized
financial information for such affiliates is disclosed in Note F of “Notes to
Consolidated Financial Statements.”
(b)
Documents required by Item 601 of Regulation S-K
|
|
3.1
|
-
|
Third
Restated Articles of Incorporation of Ashland and amendment thereto
effective February 3, 2009 (filed as Exhibit 3.1 to Ashland’s Form 10-Q
for the quarter ended December 31, 2008, and incorporated herein by
reference).
|
|
|
3.2
|
-
|
By-laws
of Ashland, effective as of June 30, 2005 (filed as Exhibit 3(ii) to
Ashland’s Form 10-Q for the quarter ended June 30, 2005, and incorporated
herein by reference).
|
18
|
|
4.1
|
-
|
Ashland
agrees to provide the SEC, upon request, copies of instruments defining
the rights of holders of long-term debt of Ashland and all of its
subsidiaries for which consolidated or unconsolidated financial statements
are required to be filed with the
SEC.
|
|
|
4.2
|
-
|
Indenture,
dated as of August 15, 1989, as amended and restated as of August 15,
1990, between Ashland and Citibank, N.A., as Trustee (filed as Exhibit 4.2
to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and
incorporated herein by reference).
|
|
|
4.3
|
-
|
Agreement
of Resignation, Appointment and Acceptance, dated as of November 30, 2006,
by and among Ashland, Wilmington Trust Company (“Wilmington”) and
Citibank, N.A. (“Citibank”) whereby Wilmington replaced Citibank as
Trustee under the Indenture dated as of August 15, 1989, as amended and
restated as of August 15, 1990, between Ashland and Citibank (filed as
Exhibit 4 to Ashland’s Form 10-Q for the quarter ended December 31, 2006,
and incorporated herein by
reference).
|
|
|
4.4
|
-
|
Indenture,
dated May 27, 2009, by and among Ashland, the Guarantors and U.S. Bank
National Association (filed as Exhibit 4.1 to Ashland’s Form 10-Q for the
quarter ended June 30, 2009, and incorporated herein by
reference).
|
|
|
4.5
|
-
|
Registration
Rights Agreement, dated May 27, 2009, by and among Ashland, the Guarantors
and Banc of America Securities, LLC and Scotia Capital (USA) Inc. (filed
as Exhibit 4.2 to Ashland’s Form 10-Q for the quarter ended June 30, 2009,
and incorporated herein by
reference).
|
|
|
4.6
|
-
|
Warrant
Agreement dated July 27, 1999 between Hercules and The Chase Manhattan
Bank, as warrant agent (filed as Exhibit 4.4 to Hercules’ Form
8-K filed on July 28, 1999 (SEC File No. 001-00496), and incorporated
herein by reference).
|
|
|
4.7
|
-
|
Form
of Series A Junior Subordinated Deferrable Interest Debentures (filed as
Exhibit 4.5 to Hercules’ Form 8-K filed on July 28, 1999 (SEC File No.
001-00496), and incorporated herein by
reference).
|
|
|
4.8
|
-
|
Form of CRESTSSM
Unit (filed as Exhibit 4.7
to Hercules’ Form 8-K filed on July 28, 1999 (SEC File No. 001-00496), and
incorporated herein by
reference).
|
|
|
4.9
|
-
|
Form
of Warrant (filed as Exhibit 4.8 to Hercules’ Form 8-K filed on July 28,
1999 (SEC File No. 001-00496), and incorporated herein by
reference).
|
|
|
4.10
|
-
|
Registration
Rights Agreement dated as of November 3, 2009 between Ashland Inc. and
Evercore Trust Company, N.A. (filed as Exhibit 4.1 to Ashland’s Form 8-K
filed on November 6, 2009, and incorporated herein by
reference).
|
The
following Exhibits 10.1 through 10.20 are contracts or compensatory plans or
arrangements or management contracts required to be filed as exhibits pursuant
to Items 601(b)(10)(ii)(A)
and 601(b)(10)(iii)(A) and
(B) of Regulation
S-K.
|
|
10.1
|
-
|
Ashland
Inc. Deferred Compensation Plan for Non-Employee Directors and Amendment
No. 1 (filed as Exhibit 10.5 to Ashland’s Form 10-Q for the quarter ended
December 31, 2004, and incorporated herein by
reference).
|
|
|
10.2
|
-
|
Ashland
Inc. Deferred Compensation Plan and Amendment No. 1 (filed as Exhibit 10.3
to Ashland’s Form 10-Q for the quarter ended December 31, 2004, and
incorporated herein by reference).
|
|
|
10.3
|
-
|
Amended
and Restated Ashland Inc. Deferred Compensation Plan for Employees (2005)
(filed as Exhibit 10.3 to Ashland’s Form 10-K for the fiscal year ended
September 30, 2008, and incorporated herein by
reference).
|
|
|
10.4
|
-
|
Amended
and Restated Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors (2005) (filed as Exhibit 10.4 to Ashland’s Form 10-K for the
fiscal year ended September 30, 2008, and incorporated herein by
reference).
|
|
|
10.5
|
-
|
Amended
and Restated Ashland Inc. Supplemental Early Retirement Plan for Certain
Employees (filed as Exhibit 10.5 to Ashland’s Form 10-K for the fiscal
year ended September 30, 2008, and incorporated herein by
reference).
|
|
|
10.6
|
-
|
Amendment
No. 1 to Amended and Restated Ashland Inc. Supplemental Early Retirement
Plan for Certain Employees (filed as Exhibit 10.1 to Ashland’s Form 10-Q
for the quarter ended December 31, 2008, and incorporated herein by
reference).
|
|
|
10.7
|
-
|
Amended
and Restated Ashland Inc. Nonqualified Excess Benefit Pension Plan (filed
as Exhibit 10.6 to Ashland’s Form 10-K for the fiscal year ended September
30, 2008, and incorporated herein by
reference).
|
19
|
|
10.8
|
-
|
Hercules
Incorporated Long Term Incentive Compensation Plan (as Amended and
Restated) (filed as Exhibit 10.2 to Ashland’s Form 10-Q for the quarter
ended December 31, 2008, and incorporated herein by
reference).
|
|
|
10.9
|
-
|
Form
of Chief Executive Officer Change in Control Agreement (filed as Exhibit
10.1 to Ashland’s Form 8-K filed on January 7, 2009, and incorporated
herein by reference).
|
|
|
10.10
|
-
|
Form
of Executive Officer Change in Control Agreement (filed as Exhibit 10.2 to
Ashland’s Form 8-K filed on January 7, 2009, and incorporated herein by
reference).
|
|
|
10.11
|
-
|
Form
of Executive Officer Change in Control Agreement, effective for agreements
entered into after July 2009.
|
|
|
10.12
|
-
|
Ashland
Inc. Severance Pay Plan (filed as Exhibit 10.3 to Ashland’s Form 8-K filed
on January 7, 2009, and incorporated herein by
reference).
|
|
|
10.13
|
-
|
Employment
Agreement between Ashland and John E. Panichella (filed as Exhibit 10.14
to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and
incorporated herein by reference).
|
|
|
10.14
|
-
|
Employment
Agreement between Ashland and Paul C. Raymond, III (filed as Exhibit 10.15
to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and
incorporated herein by reference).
|
|
|
10.15
|
-
|
Form
of Indemnification Agreement between Ashland and members of its Board of
Directors (filed as Exhibit 10.10 to Ashland’s annual report on Form 10-K
for fiscal year ended September 30, 2005, and incorporated herein by
reference).
|
|
|
10.16
|
-
|
Ashland
Inc. 1997 Stock Incentive Plan (filed as Exhibit 10.17 to Ashland’s Form
10-K for the fiscal year ended September 30, 2008, and incorporated herein
by reference).
|
|
|
10.17
|
-
|
Amended
and Restated Ashland Inc. Incentive
Plan.
|
|
|
10.18
|
-
|
2006
Ashland Inc. Incentive Plan (filed as Exhibit 10 to Ashland’s Form 10-Q
for the quarter ended December 31, 2005, and incorporated herein by
reference).
|
|
|
10.19
|
-
|
Form
of Notice granting Stock Appreciation Rights
Awards.
|
|
|
10.20
|
-
|
Form
of Notice granting Restricted Stock Awards (filed as Exhibit 10.21 to
Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and
incorporated herein by reference).
|
|
|
10.21
|
-
|
Agreement
and Plan of Merger dated as of July 10, 2008 among Ashland, Ashland
Sub-One, Inc. and Hercules Incorporated (filed as Exhibit 2.1 to Ashland’s
Form 8-K filed on July 14, 2008, and incorporated herein by
reference).
|
|
|
10.22
|
-
|
Credit
Agreement dated as of November 13, 2008 among Ashland, Bank of America,
N.A., as Administrative Agent, The Bank of Nova Scotia, as Syndication
Agent, the other Lenders party thereto, and Banc of America Securities LLC
and The Bank of Nova Scotia, as Joint Lead Arrangers and Joint Book
Managers (filed as Exhibit 10.1 to Ashland’s Form 8-K filed on November
19, 2008, and incorporated herein by
reference).
|
|
|
10.23
|
-
|
Amendment
No. 1 to Credit Agreement, dated as of April 17, 2009 (filed as Exhibit 10
to Ashland’s Form 10-Q for the quarter ended March 31, 2009, and
incorporated herein by reference).
|
|
|
10.24
|
-
|
Amendment
No. 2 to Credit Agreement, dated as of May 20, 2009 (filed as Exhibit 10.2
to Ashland’s Form 10-Q for the quarter ended June 30, 2009, and
incorporated herein by reference).
|
|
|
10.25
|
-
|
Transfer
and Administration Agreement dated as of November 13, 2008 among CVG
Capital II LLC, Ashland, in its capacity as both initial Originator and
initial Servicer, each of YC SUSI Trust and Liberty Street Funding LLC, as
Conduit Investors and Uncommitted Investors, Bank of America, National
Association, as a Letter of Credit Issuer, a Managing Agent, an
Administrator and a Committed Investor and as the Agent, The Bank of Nova
Scotia, as a Letter of Credit Issuer, a Managing Agent, an Administrator
and a Committed Investor, and the Letter of Credit Issuers, Managing
Agents, Administrators, Uncommitted Investors and Committed Investors
parties thereto from time to time (filed as Exhibit 10.3 to Ashland’s Form
8-K filed on November 19, 2008, and incorporated herein by
reference).
|
|
|
10.26
|
-
|
First
Amendment to the Transfer and Administration Agreement dated as of
November 4, 2009 among Ashland Inc., CVG Capital II LLC, the Investors,
Letter of Credit Issuers, Managing Agents and Administrators party hereto,
and Bank of America, N.A., as Agent for the
Investors.
|
20
|
|
10.27
|
-
|
Sale
Agreement dated as of November 13, 2008 among Ashland and CVG Capital II
LLC (filed as Exhibit 10.4 to Ashland’s Form 8-K filed on November 19,
2008, and incorporated herein by
reference).
|
|
|
10.28
|
-
|
Purchase
Agreement for the $650 Million 9 1/8% Senior Notes due 2017, dated May 19,
2009, between Ashland and Banc of America Securities, LLC, Scotia Capital
(USA) Inc. and SunTrust Robinson Humphrey, Inc. (filed as Exhibit 10.1 to
Ashland’s Form 10-Q for the quarter ended June 30, 2009, and incorporated
herein by reference).
|
|
|
11
|
-
|
Computation
of Earnings Per Share (appearing in Note A of “Notes to Consolidated
Financial Statements” in this annual report on Form
10-K).
|
|
|
12
|
-
|
Computation
of Ratio of Earnings to Fixed
Charges.
|
|
|
21
|
-
|
List
of Subsidiaries.
|
|
|
23.1
|
-
|
Consent
of PricewaterhouseCoopers LLP.
|
|
|
23.2
|
-
|
Consent
of Ernst & Young LLP.
|
|
|
23.3
|
-
|
Consent
of Hamilton, Rabinovitz & Associates,
Inc..
|
|
|
24
|
-
|
Power
of Attorney.
|
|
|
31.1
|
-
|
Certification
of James J. O’Brien, Chief Executive Officer of Ashland, pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
-
|
Certification
of Lamar M. Chambers, Chief Financial Officer of Ashland, pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32
|
-
|
Certification
of James J. O’Brien, Chief Executive Officer of Ashland, and Lamar M.
Chambers, Chief Financial Officer of Ashland, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
Upon
written or oral request, a copy of the above exhibits will be furnished at
cost.
21
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
ASHLAND
INC.
|
|||
|
(Registrant)
|
|||
|
By:
|
|||
|
/s/
Lamar M. Chambers
|
|||
|
Lamar
M. Chambers
|
|||
|
Senior
Vice President and Chief Financial Officer
|
|||
|
Date:
November 23, 2009
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant, in the
capacities indicated, on November 23, 2009.
|
Signatures
|
Capacity
|
||
|
/s/
James J. O'Brien
_____________________________________
James
J. O’Brien
|
Chairman
of the Board, Chief Executive Officer and Director
(Principal
Executive Officer)
|
||
|
/s/
Lamar M. Chambers
_____________________________________
Lamar
M. Chambers
|
Senior
Vice President and Chief Financial Officer
(Principal
Financial Officer)
|
||
|
/s/
J. William Heitman
_____________________________________
J.
William Heitman
|
Vice
President and Controller
(Principal Accounting Officer)
|
||
|
*
_____________________________________
Roger
W. Hale
|
Director
|
||
|
*
_____________________________________
Bernadine
P. Healy
|
Director
|
||
|
*
_____________________________________
Kathleen
Ligocki
|
Director
|
||
|
*
_____________________________________
Vada
O. Manager
|
Director
|
||
|
*
_____________________________________
Barry
W. Perry
|
Director
|
||
|
*
_____________________________________
Mark
C. Rohr
|
Director
|
||
|
*
_____________________________________
George
A. Schaefer, Jr.
|
Director
|
||
|
*
_____________________________________
Theodore
M. Solso
|
Director
|
||
|
*
_____________________________________
John
F. Turner
|
Director
|
||
|
*
_____________________________________
Michael
J. Ward
|
Director
|
|
*By:
|
/s/
David L. Hausrath
|
|
David
L. Hausrath
|
|
Attorney-in-Fact
|
|
| Date: | November 23, 2009 |
22
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying Notes to Consolidated Financial
Statements for the years ended September 30, 2009, 2008 and 2007.
BUSINESS
OVERVIEW
Ashland
profile
Ashland
is a global specialty chemicals company that provides products, services and
solutions that meet customer needs throughout a variety of
industries. With approximately 14,700 employees worldwide, Ashland
serves customers in more than 100 countries.
Established
in 1924 as a regional petroleum refiner, Ashland, during the past several years,
has been focused on the objective of creating a dynamic, global specialty
chemicals company. In that process, Ashland has divested certain
noncore businesses, redesigned business models, and acquired businesses in
growth markets like specialty additives, functional ingredients, water and
adhesives to enhance Ashland’s specialty chemicals
offerings. Ashland’s acquisition of Hercules Incorporated (Hercules),
in November 2008, propels the combined company to a global leadership position
with expanded capabilities and promising growth potential in specialty additives
and functional ingredients, paper and water technologies, and specialty
resins.
With the
acquisition of Hercules, Ashland has expanded its international footprint as
Ashland’s sales and operating revenues (revenues) generated outside of North
America in 2009 increased to 32% from 29% and 28% in 2008 and 2007,
respectively. Revenue by region expressed as a percentage of total
consolidated revenue for the years ended September 30, 2009, 2008 and 2007 was
as follows:
|
Revenues
by Geography
|
2009
|
(a) |
2008
|
2007
|
||||||||
|
North
America
|
68 | % | 71 | % | 72 | % | ||||||
|
Europe
|
20 | % | 21 | % | 20 | % | ||||||
|
Asia
Pacific
|
8 | % | 5 | % | 5 | % | ||||||
|
Latin
America & other
|
4 | % | 3 | % | 3 | % | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
(a)Revenues from the acquired operations
of Hercules are included herein from November 14, 2008.
Business
segments
As
discussed above, Ashland completed the acquisition of Hercules in November
2008. Ashland’s reporting structure is now composed of five reporting
segments: Ashland Aqualon Functional Ingredients (Functional
Ingredients), previously Hercules’ Aqualon Group, Ashland Hercules Water
Technologies (Water Technologies), which includes Hercules’ Paper Technologies
and Ventures segment as well as Ashland’s legacy Water Technologies segment,
Ashland Performance Materials (Performance Materials), Ashland Consumer Markets
(Consumer Markets), and Ashland Distribution (Distribution). For
further descriptions of each business segment see the “Results of Operations –
Business Segment Review” beginning on page M-7.
Total
consolidated revenue for 2009, 2008 and 2007 as a percent of revenue by business
segment was as follows:
|
|
2009
|
(a) |
2008
|
2007
|
||||||||
|
Functional
Ingredients
|
10%
|
n/a
|
n/a
|
|||||||||
|
Water
Technologies
|
20%
|
11%
|
11%
|
|||||||||
|
Performance
Materials
|
13%
|
19%
|
18%
|
|||||||||
|
Consumer
Markets
|
20%
|
19%
|
20%
|
|||||||||
|
Distribution
|
37%
|
51%
|
51%
|
|||||||||
|
100%
|
100%
|
100%
|
||||||||||
(a)Revenues
from the acquired operations of Hercules are included herein from November 14,
2008.
M-1
KEY
2009 DEVELOPMENTS
During
2009, the following operational decisions and economic developments had an
impact on Ashland’s current and future cash flows, results of operations and
financial position.
Hercules
acquisition
Ashland’s
acquisition of Hercules in November 2008 was a significant step in achieving
Ashland’s objective of creating a leading, global specialty chemicals
company. The new combined company is comprised of a core of three
specialty chemical businesses: specialty additives and functional
ingredients, paper and water technologies, and specialty resins, which will
drive Ashland both strategically and financially. This acquisition
positions Ashland to deliver more stable and predictable earnings, generate
stronger cash flows and gain access to higher growth markets
worldwide.
The
transaction was valued at $2,594 million and included $799 million of debt
assumed in the acquisition. As part of the financing arrangement for
the transaction, Ashland borrowed $2,300 million, which included $100 million
drawn on the $400 million revolving credit facility, a $400 million term loan A
facility, an $850 million term loan B facility, a $200 million accounts
receivable securitization facility and a $750 million bridge loan that was
subsequently replaced with the issuance of $650 million senior unsecured bonds
in May 2009. Ashland retained $205 million of assumed Hercules
debt.
As a
result of the financing and subsequent debt incurred to complete the Hercules
acquisition, Standard & Poor’s and Moody’s Investor Services downgraded
Ashland’s corporate credit rating to BB- and Ba2, respectively. In
addition, Ashland is now subject to certain restrictions from various debt
covenants. These covenants include certain affirmative covenants such
as various internal certifications, maintenance of property, preferential
security interest in acquired property, restriction on future dividend payments
and applicable insurance coverage as well as negative covenants that include
financial covenant restrictions associated with leverage and fixed charge
coverage ratios and total net worth and capital expenditure
levels. As a result of these new covenant restrictions, Ashland’s
focus during 2009 was to pay down debt by concentrating on generating cash and
savings from: increased profitability from sales; reductions in
operating expenses, working capital, capital expenditures and dividends; and the
sale of non-strategic assets, primarily business divestitures and auction rate
securities. This focus and efficient execution on these cash
generation and savings opportunities enabled Ashland to reduce debt by
approximately $1 billion in debt during 2009 despite a steep economic
decline.
Drew
Marine divestiture
In August
2009, Ashland sold its global marine services business known as Drew Marine, a
business unit of Water Technologies, to J.F. Lehman & Co. in a transaction
valued pretax at approximately $120 million before tax, which was subsequently
reduced by $4 million after giving affect to post-closing adjustments related to
working capital. This transaction resulted in a pretax gain of $56
million, which is included in the net gain (loss) on divestitures caption of the
Statement of Consolidated Income. This sale reflects Ashland’s
strategy to strengthen its core specialty chemicals businesses. The
Drew Marine business is a recognized global leader in providing technical
solutions, high value products and services to the global marine industry,
including chemicals and testing equipment, water treatment, tank cleaners and
corrosion inhibitors, sealing and welding products, refrigerants and
refrigeration services, engineered systems and products, fuel management
programs and fire safety and rescue products and services.
Economic
environment
Ashland’s
financial performance during 2009 was severely impacted by a significant decline
in demand within the markets it conducts business, a direct result of continued
weakness in the global economy, especially within North America and Europe,
which began broadly at the end of 2008. Ashland experienced
significant volume declines of 6% to 22% across all of its business segments
during 2009. Despite this pressure, Ashland was able to manage
pricing and reduce costs, resulting in an overall improved gross profit
margin. This is particularly evident for Consumer Markets, where the
gross profit as a percent of sales increased significantly during the twelve
months ended September 30, 2009, compared to the prior year. Overall,
Ashland’s aggressive pricing management and cost reduction initiatives
outweighed the significant volume declines during 2009, enabling Ashland to
increase operating cash flows and substantially reduce debt associated with the
financing of the Hercules acquisition.
Cost-structure
efficiency and Hercules integration programs
During
2008, Ashland implemented operational redesigns (2008 Program), primarily within
Ashland’s Water Technologies and Performance Materials businesses, to take
proactive steps to enhance profitability through streamlined operations and an
improved overall cost structure of the businesses. This program
continued during 2009 and was further expanded to capture additional cost saving
opportunities.
In
conjunction with the Hercules acquisition in November 2008, Ashland announced an
integration plan (Integration Plan) that targeted certain projected cost savings
as part of combining joint and redundant services and
facilities. This
M-2
program
focused primarily on capturing operational, selling and administrative savings
within the combined company. Additionally, with the prolonged and
significant deterioration of global economic demand during 2009, Ashland
announced in January 2009 an additional cost reduction and organizational
restructuring plan (2009 Program), which was subsequently expanded in July 2009,
to further reduce Ashland’s overall cost structure.
A summary
of each program, along with targeted savings and status as of September 30,
2009, is as follows:
2008
Program – Originally intended to produce annualized cost savings of
$40 million by the end of 2009, primarily within the Water Technologies and
Performance Materials businesses, was expanded to $85 million by the end of
2009. Essentially all cost savings initiatives related to this
program have been achieved as of the end of 2009.
Integration
Program – Originally intended to produce synergy cost savings of $50
million, was expanded to $130 million in expected synergy savings by the
end of 2010. As of the end of fiscal 2009, Ashland has achieved
essentially all of the total run rate cost savings associated with this
program.
2009
Program – Originally intended to produce reduced costs (including
various plant and operational efficiencies and significant reductions in travel
and entertainment expenses) of $85 million. This program was
expanded to $185 million and includes a specific $27 million cost reduction
program within Distribution to realign the cost structure of this business and
additional continued efforts to resize Ashland to match the current global
economic demand. As of the end of 2009, Ashland has achieved
approximately $140 million in total run rate cost savings associated with this
program. Other items included in the program announced in January
2009, but not part of the totals above, reduced costs during 2009
only. These items primarily included:
|
·
|
Freezing
wage and salaries globally for 2009, except where legally mandated
otherwise, with estimated savings of approximately $25 million;
and
|
|
·
|
Implementing
a two-week furlough program for most U.S. and Canadian based employees,
that was essentially completed in June of 2009, and several other job and
benefits related actions. Furlough program savings totaled
approximately $25 million.
|
In total,
Ashland has achieved run rate cost reductions of $355 million of the combined
$400 million in these cost reduction initiatives. The cumulative
effect of these restructuring activities has resulted in the elimination of
approximately 1,600 employee positions and eight permanent facility closings
through the end of 2009 and in total is currently expected to reduce the global
workforce by a total of approximately 1,900, or 12% by the end of
2010. As of September 30, 2009, the total restructuring cost incurred
under the cost-structure efficiency programs during 2009 was $96 million, of
which $75 million during 2009 had been charged as an expense within the
Statement of Consolidated Income, consisting of $58 million classified
within the selling, general and administrative expense caption and
$17 million of accelerated depreciation charged to the cost of sales and
operating expenses caption. The remaining cost of $21 million related
to severance associated with Hercules personnel, which qualified for purchase
method of accounting in accordance with U.S. GAAP, and had no effect on the
Statement of Consolidated Income. Additional costs from reductions in
resources or facilities may occur in future periods; which could include charges
related to additional severance, plant closings, reassessed pension plan
valuations or other items, although Ashland does not currently expect these to
be significant. Ashland anticipates completing these restructuring
activities during 2010. For further information on Ashland’s
cost-structure efficiency and Hercules’ integration programs, see Note D of
Notes to Consolidated Financial Statements.
RESULTS
OF OPERATIONS – CONSOLIDATED REVIEW
Ashland’s
net income amounted to $71 million in 2009, $167 million in 2008 and $230
million in 2007, or $.96, $2.63 and $3.60 diluted earnings per share,
respectively. Income from continuing operations, which excludes
results from discontinued operations, amounted to $78 million in 2009, $175
million in 2008 and $201 million in 2007, or $1.07, $2.76 and $3.15 per diluted
earnings per share, respectively.
Ashland’s
net income is primarily affected by results within operating income, net
interest and other financing (expense) income, income taxes and discontinued
operations. Operating income amounted to $390 million in 2009, $213
million in 2008 and $216 million in 2007. Operating results in 2009
compared to 2008 increased as the acquisition of Hercules businesses increased
operating income by approximately $49 million in 2009, despite $47 million
in nonrecurring purchase accounting charges related to inventory fair value
adjustments and in-process research and development. In addition,
Ashland incurred $75 million for severance charges and accelerated depreciation
for the ongoing integration and reorganization from the Hercules acquisition and
other cost-structure efficiency programs. These key items, along with
significant volume declines across all business segments, severely effected
operating results as compared to the prior period for legacy Ashland businesses,
but were more than offset by aggressive cost reductions, lower raw materials
costs and the affects of price increases, particularly within the Consumer
Markets segment. Operating results in 2008 compared to 2007 declined
slightly as operating income decreases in Performance Materials and Water
Technologies were offset by an operating income increase in Distribution and
income associated with Unallocated and other.
M-3
Ashland
incurred net interest and other financing expense of $205 million during 2009 as
compared to net interest and other financing income of $28 million in 2008 and
$46 million in 2007, with the current year expense primarily attributable to the
debt issued in conjunction with the financing of the Hercules
acquisition. The decrease in net interest and other financing income
in 2008 compared to 2007 primarily reflects the lower interest rate environment
for short-term investment instruments. In 2009, Ashland incurred
certain significant nonrecurring items that included a $56 million gain from the
sale of Drew Marine, which was reported within the net gain (loss) on
divestitures caption of the Statement of Consolidated Income, as well as a
$54 million loss related to cross-currency swaps and a $32 million
loss on auction rate securities, which were both caused by the Hercules
acquisition and reported within the other expense caption of the Statement of
Consolidated Income.
The
effective income tax rate for 2009 of 50.6% was significantly affected by the
other expense caption items described above as well as certain resolutions to
previously open foreign and domestic tax matters during the year. The
effective tax rate of 32.9% during 2008 and 22.3% during 2007 were impacted by
several nonrecurring charges during the year as well as the resolution of
specific foreign and domestic tax matters, but to a lesser extent than during
2009.
Discontinued
operations was a $7 million and $8 million loss, respectively, during 2009 and
2008 and income of $29 million during 2007. Each year had
various adjustments related to previously recorded divestiture gains as well as
updates to the asbestos liability and receivable models, which in 2007 included
a significant income adjustment of $18 million after-tax relating to
improved credit quality in a certain receivable.
A
comparative analysis of the Statement of Consolidated Income by caption is
provided as follows for the years ended September 30, 2009, 2008 and
2007.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
|
2008
change
|
||||||||||||||
|
Sales
and operating revenues
|
$ | 8,106 | $ | 8,381 | $ | 7,785 | $ | (275 | ) | $ | 596 | |||||||||
Revenues
for 2009 decreased $275 million, or 3%, compared to 2008. The current
year included $1,709 million, or 20%, in additional revenues related to the
acquired Hercules businesses. Significant volume declines across all
businesses substantially decreased revenue by $1,585 million, or 19%, with
unfavorable currency exchange rates decreasing revenue by $292 million, or 3%,
compared to 2008. Net price and mix decreases of $189 million, or 2%,
also reduced revenues compared to 2008 as successful price management within
Consumer Markets and Water Technologies were more than offset by price declines
within Performance Materials and Distribution. Revenues from the
acquisition of the pressure-sensitive adhesive and atmospheric emulsions
business of Air Products and Chemicals, Inc. (Air Products) within Performance
Materials in June 2008 contributed an additional $82 million, or 1%, in
2009.
Revenues
for 2008 increased $596 million, or 8%, from 2007 primarily due to increased
pricing of $560 million and $288 million related to a favorable currency
exchange as well as $34 million from the acquisition of Air
Products. This increase was partially offset by a $143 million
decrease related to declines in both volume and product mix as well as an
additional $143 million decrease related to the elimination of a one-month
financial reporting lag for foreign operations (reporting lag) during
2007. During 2008, pricing increases were consistently implemented
across each of Ashland’s businesses to recover significant cost increases
occurring within volatile raw material markets. Volumes declined
modestly, despite the difficult market conditions that continued to deteriorate
the North American economy throughout 2008, particularly in core sectors such as
building and construction, coatings, transportation and marine. The
currency exchange rate is principally influenced by the U.S. dollar’s (USD)
performance against the Euro.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Cost
of sales and operating expenses
|
$ | 6,317 | $ | 7,056 | $ | 6,447 | $ | (739 | ) | $ | 609 | |||||||||
|
Gross
profit as a percent of sales
|
22.1 | % | 15.8 | % | 17.2 | % | ||||||||||||||
Cost of
sales and operating expenses (cost of sales) for 2009 decreased $739 million, or
11%, compared to 2008 as increases related to the acquisitions of Hercules and
Air Products were more than offset by significant declines in volume and raw
material costs in 2009 as compared to 2008. The acquisitions of
Hercules and Air Products represented a $1,308 million, or 18%, increase in
cost of sales for 2009, which includes a nonrecurring charge of $37 million
associated with the inventory fair value adjustment of Hercules’ acquired
inventory. Additionally, a change in product mix increased cost of
sales by $18 million. Significant volume declines reduced cost of
sales by $1,276 million, or 18%, while currency exchange, due to the
strengthening of the U.S. dollar’s average as compared to 2008, reduced cost of
sales by $224 million, or 3%. Decreases in raw material costs
contributed an additional $565 million, or 8%, decline in cost of
sales. Gross profit as a percent of sales (gross profit margin)
increased by 6.3 percentage points compared to 2008 as a result of the Hercules
acquisition, which included higher margin businesses, the mix of higher margin
products sold during 2009 and improved pricing, particularly within Consumer
Markets.
M-4
Cost of
sales for 2008 increased 9% compared to 2007, which resulted in an overall 1%
decline in gross profit margin. Raw material price increases were the
primary factor for this gross profit decline, which represented a $591 million
cost increase compared to 2007 as volatile pricing in the crude oil market,
which experienced an approximate 75% increase in the cost per barrel of oil
during 2008 before peaking at over $145 a barrel, also influenced other
significant hydrocarbon based raw materials throughout 2008. Currency
exchange rates increased cost of sales $228 million, while the Air Products
acquisition added an additional $32 million. These cost of sales
increases were partially offset by a combined $127 million decrease related to
volume declines and product mix as well as a $115 million decline related to the
reporting lag elimination during 2007.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Selling, general
and administrative expenses
|
$ | 1,341 | $ | 1,118 | $ | 1,126 | $ | 223 | $ | (8 | ) | |||||||||
|
As
a percent of revenues
|
16.5 | % | 13.3 | % | 14.5 | % | ||||||||||||||
Selling,
general and administrative expenses for 2009 increased 20% compared to 2008,
with selling, general and administrative expenses as a percent of revenue
increasing 3.2 percentage points as the acquisition of Hercules businesses and
several key charges increased this percentage. Expenses impacting the
comparability of 2009 as compared to 2008 include $58 million in severance and
restructuring charges, primarily due to the ongoing integration and
reorganization from the Hercules acquisition. The acquisitions of
Hercules and Air Products added $348 million in selling, general and
administrative expenses (excluding the severance and restructuring charges) as
compared to 2008. Ashland’s cost reduction initiatives and other
items reduced expenses by $138 million from 2008, while currency exchange
effects reduced selling, general and administrative expenses by $45
million. For further information on cost cutting initiatives see the
“Key Fiscal 2009 Developments” discussion within Management’s Discussion and
Analysis as well as Note D in the Notes to Consolidated Financial
Statements.
Selling,
general and administrative expenses for 2008 decreased slightly compared to 2007
while decreasing 1.2 percentage points as a percent of total
revenue. Expenses impacting the comparability of 2008 compared to
2007 include charges recorded in 2007 that consisted of $25 million for the
voluntary severance offer, $22 million for the elimination of the reporting lag
and $8 million related to an expense for certain postretirement
plans. These expenses did not occur in 2008. Expenses
during 2008 were negatively impacted by $40 million for currency exchange and
$11 million for severance charges, related to realignment of certain
businesses within Ashland during 2008, partially offset by $4 million of
decreased other costs.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Research
and development expenses
|
$ | 96 | $ | 48 | $ | 45 | $ | 48 | $ | 3 | ||||||||||
Research
and development expenses for 2009 doubled compared to 2008 and included a charge
of $10 million related to the purchased in-process research and development
projects at Hercules as of the acquisition date. The acquired
businesses of Hercules added $45 million in research and development expenses
(excluding the previously mentioned in-process research and development charge)
as compared to 2008, while legacy Ashland businesses decreased expenses by $10
million during 2009. Research and development expenses increased $3
million in 2008 as compared to 2007.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Equity
and other income
|
||||||||||||||||||||
|
Equity
income
|
$ | 14 | $ | 23 | $ | 15 | $ | (9 | ) | $ | 8 | |||||||||
|
Other
income
|
24 | 31 | 34 | (7 | ) | (3 | ) | |||||||||||||
| $ | 38 | $ | 54 | $ | 49 | $ | (16 | ) | $ | 5 | ||||||||||
Total
equity and other income decreased 30% during 2009 compared to
2008. The decrease in 2009 primarily relates to decreased equity
income from joint ventures associated with Performance Materials, which have
been severely impacted by significant declines in global
demand. Total equity and other income increased 10% during 2008
compared to 2007. The increase in 2008 primarily related to improved
performance from various foreign joint venture associations compared to
2007.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Net
gain (loss) on divestitures
|
$ | 59 | $ | 20 | $ | (3 | ) | $ | 39 | $ | 23 | |||||||||
M-5
Net gain
(loss) on divestitures includes the 2009 sale of Drew Marine, a division within
Water Technologies, as well as the 2005 transfer of Ashland’s 38% interest in
Marathon Ashland Petroleum LLC (MAP Transaction) along with two other businesses
to Marathon Oil Corporation (Marathon). Ashland recorded a gain of
$56 million during 2009 related to the sale of Drew Marine. The gain
in 2008 primarily relates to the settlement with Marathon of certain tax related
matters associated with the MAP Transaction, which resulted in a $23 million
gain. Other gains and losses recorded during the three-year period
primarily relate to increases and decreases in the recorded receivable from
Marathon for the estimated present value of future tax deductions related
primarily to environmental and other postretirement obligations. See
Note C of Notes to Consolidated Financial Statements for further discussion on
divestitures.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Net
interest and other financing (expense) income
|
||||||||||||||||||||
|
Interest
income
|
$ | 21 | $ | 40 | $ | 59 | $ | (19 | ) | $ | (19 | ) | ||||||||
|
Interest
expense
|
(215 | ) | (9 | ) | (10 | ) | (206 | ) | 1 | |||||||||||
|
Other
financing costs
|
(11 | ) | (3 | ) | (3 | ) | (8 | ) | - | |||||||||||
| $ | (205 | ) | $ | 28 | $ | 46 | $ | (233 | ) | $ | (18 | ) | ||||||||
The
increase in net interest and other financing expense of $233 million during 2009
primarily relates to an increase in interest expense of $206 million compared to
2008, which represents interest charges associated with debt drawn upon the
closing, on November 13, 2008, of the Hercules acquisition, which also increased
other financing costs as compared to 2008. Interest expense for 2009
includes $52 million of amortization for deferred debt issuance costs, with
$10 million related to the bridge loan extinguishment that was converted
into senior unsecured bonds during 2009. In addition, interest
expense included $8 million related to accelerated amortization from prepayments
made on both the term loan A and term loan B facilities. In
conjunction with the Hercules acquisition, interest income declined during 2009
as the remaining funding to complete the merger was paid from Ashland’s existing
liquid investments.
The
decrease of $18 million in net interest and other financing income during 2008
compared to 2007 primarily related to the decrease in interest income to $40
million in 2008 from $59 million in 2007, reflecting the lower interest rate
environment for short-term investment instruments compared to
2007. Interest expense and other financial costs remained consistent
from 2007 to 2008.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Other
expenses
|
||||||||||||||||||||
|
Loss
on currency swaps
|
$ | (54 | ) | $ | - | $ | - | $ | (54 | ) | $ | - | ||||||||
|
Loss
on auction rate securities
|
(32 | ) | - | - | (32 | ) | - | |||||||||||||
| $ | (86 | ) | $ | - | $ | - | $ | (86 | ) | $ | - | |||||||||
Other
expenses included two significant nonrecurring items caused by the Hercules
acquisition. The first was a $54 million loss on currency swaps
related to a swap associated with the Hercules acquisition. Hercules
had held a significant hedge against certain open currency swap positions that
Ashland immediately settled upon the acquisition. The second was a
$32 million charge on auction rate securities as a result of a permanent
realized loss on these securities due to the continued illiquid market these
securities trade in and Ashland’s change in intent to no longer hold these
securities until maturity. For further information on auction rate
securities see the “Liquidity” discussion within Management’s Discussion and
Analysis as well as Note G of Notes to Consolidated Financial
Statements.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Income
tax expense
|
$ | 80 | $ | 86 | $ | 58 | $ | (6 | ) | $ | 28 | |||||||||
|
Effective
tax rate
|
50.6 | % | 32.9 | % | 22.3 | % | ||||||||||||||
The
overall effective tax rate was significantly increased during 2009 due to
several key factors. Using a 35% statutory federal tax rate applied
to the income from continuing operations for 2009, income taxes would have been
an expense of $55 million. Significant discrete items for 2009
included an $8 million valuation allowance on auction rate security losses and
increases in the resolution and re-evaluation of tax positions taken in prior
years of $29 million. These discrete expense items were partially
offset by research and development credits of $9 million. See Note L
of Notes to Consolidated Financial Statements for a complete reconciliation of
Ashland’s tax provision for the last three years to the 35% U.S. statutory
rate.
The
overall effective tax rate significantly increased in 2008 from 2007 due to
several key factors. Significant volatility in the capital markets as
it relates to investments held for life insurance policies resulted in a $9
million tax effect in 2008,
M-6
which
historically has been a tax benefit for Ashland. In addition, during
2007 Ashland recorded a $15 million tax benefit related to dividends held
within the employee stock ownership plan compared with a $1 million tax benefit
in 2008, primarily due to the special dividend of $10.20 paid on October 25,
2006 as part of the distribution to shareholders of a substantial portion of the
APAC divestiture proceeds.
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
change
|
2008
change
|
|||||||||||||||
|
Income
from discontinued operations (net of tax)
|
||||||||||||||||||||
|
APAC
|
$ | (6 | ) | $ | (6 | ) | $ | (5 | ) | $ | - | $ | (1 | ) | ||||||
|
Asbestos-related
litigation reserves
|
2 | (2 | ) | 35 | 4 | (37 | ) | |||||||||||||
|
Electronic
Chemicals
|
(3 | ) | - | (1 | ) | (3 | ) | 1 | ||||||||||||
| $ | (7 | ) | $ | (8 | ) | $ | 29 | $ | 1 | $ | (37 | ) | ||||||||
During
2009, Ashland recorded two adjustments that related to prior periods within the
discontinued operations caption of the Statement of Consolidated
Income. These included a charge related to a change in the duration
period on a retained environmental liability from the Electronic Chemicals
business (divested in 2003) and a charge related to a tax basis adjustment from
the APAC divestiture. Ashland assessed the affect these adjustments
had on income from discontinued operations and net income in the current and
prior periods and, after considering quantitative and qualitative factors,
determined such adjustments to be below the threshold that would necessitate a
restatement of the consolidated financial statements for the prior
years. Ashland also considered the impact of these prior period
adjustments on its internal controls and financial reporting and based on
qualitative and quantitative factors, including the discrete nature of the
transactions involved, concluded that the matters did not indicate a material
weakness in internal controls over financial reporting.
During
2008 and 2007, subsequent tax adjustments reduced the gain on the sale of
APAC. Ashland periodically updates the model used for purposes of
valuing the asbestos-related litigation reserves, which resulted in a net $2
million charge in 2008, and a favorable net $2 million and $17 million
adjustment during 2009 and 2007, respectively. Additionally, during
2007 a favorable $18 million after-tax adjustment was recorded due to a
reassessed assumption for a certain asbestos receivable due to improved credit
quality.
Quarterly
operating income (loss)
The
following details Ashland’s quarterly reported operating income for the years
ended September 30, 2009, 2008 and 2007.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
December
31
|
$ | (7 | ) | $ | 46 | $ | 58 | |||||
|
March
31
|
112 | 52 | 41 | |||||||||
|
June
30
|
152 | 87 | 91 | |||||||||
|
September
30
|
133 | 28 | 26 | |||||||||
RESULTS
OF OPERATIONS – BUSINESS SEGMENT REVIEW
Results
of Ashland’s business segments are presented based on its management structure
and internal accounting practices. The structure and practices are
specific to Ashland; therefore, the financial results of Ashland’s business
segments are not necessarily comparable with similar information for other
comparable companies. Ashland refines its expense allocation
methodologies to the reportable segments from time to time as internal
accounting practices are improved, more refined information becomes available
and businesses change. Revisions to Ashland’s methodologies that are
deemed insignificant are applied on a prospective basis. During 2009,
Ashland began fully allocating significant actual corporate costs as opposed to
budgeted expenditures which was utilized in prior periods, except for certain
significant company-wide restructuring activities, such as the current
restructuring plan related to the Hercules acquisition described in Note D of
Notes to Consolidated Financial Statements, and other costs or adjustments that
relate to former businesses that Ashland no longer operates. To align
prior period results to the current period presentation, Ashland reclassified
certain depreciation and amortization charges in 2008 and 2007 that were
previously presented within the unallocated and other section to the applicable
reporting segments that were originally allocated these corporate
charges.
As
previously discussed, Ashland’s businesses are managed along five industry
segments: Functional Ingredients, Water Technologies, Performance
Materials, Consumer Markets and Distribution. For additional
information, see Note Q in the Notes to Consolidated Financial
Statements.
M-7
The
following table shows revenues, operating income and statistical operating
information by business segment for each of the last three years ended
September 30.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
and operating revenues
|
||||||||||||
|
Functional
Ingredients
|
$ | 812 | $ | - | $ | - | ||||||
|
Water
Technologies
|
1,652 | 893 | 818 | |||||||||
|
Performance
Materials
|
1,106 | 1,621 | 1,580 | |||||||||
|
Consumer
Markets
|
1,650 | 1,662 | 1,525 | |||||||||
|
Distribution
|
3,020 | 4,374 | 4,031 | |||||||||
|
Intersegment
sales
|
(134 | ) | (169 | ) | (169 | ) | ||||||
| $ | 8,106 | $ | 8,381 | $ | 7,785 | |||||||
|
Operating
income (loss)
|
||||||||||||
|
Functional
Ingredients
|
$ | 36 | $ | - | $ | - | ||||||
|
Water
Technologies
|
78 | 10 | 16 | |||||||||
|
Performance
Materials
|
1 | 52 | 89 | |||||||||
|
Consumer
Markets
|
252 | 83 | 86 | |||||||||
|
Distribution
|
52 | 51 | 41 | |||||||||
|
Unallocated
and other
|
(29 | ) | 17 | (16 | ) | |||||||
| $ | 390 | $ | 213 | $ | 216 | |||||||
|
Depreciation
and amortization
|
||||||||||||
|
Functional
Ingredients (a)
|
$ | 106 | $ | - | $ | - | ||||||
|
Water
Technologies (a)
|
99 | 29 | 29 | |||||||||
|
Performance
Materials
|
63 | 46 | 39 | |||||||||
|
Consumer
Markets
|
36 | 35 | 34 | |||||||||
|
Distribution
|
28 | 28 | 25 | |||||||||
|
Unallocated
and other
|
7 | 7 | 6 | |||||||||
| $ | 339 | $ | 145 | $ | 133 | |||||||
|
Operating
information
|
||||||||||||
|
Functional
Ingredients (b)
(c)
|
||||||||||||
|
Sales
per shipping day
|
$ | 3.7 | $ | - | $ | - | ||||||
|
Metric
tons sold (thousands)
|
154.1 | - | - | |||||||||
| Gross profit as a percent of sales | 26.7 | % | - | - | ||||||||
|
Water
Technologies (b)
(c)
|
||||||||||||
|
Sales
per shipping day
|
$ | 6.6 | $ | 3.5 | $ | 3.1 | ||||||
| Gross profit as a percent of sales | 33.9 | % | 36.7 | % | 39.2 | % | ||||||
|
Performance
Materials (b)
|
||||||||||||
|
Sales
per shipping day
|
$ | 4.4 | $ | 6.4 | $ | 6.1 | ||||||
|
Pounds
sold per shipping day
|
3.9 | 4.9 | 4.9 | |||||||||
| Gross profit as a percent of sales | 17.0 | % | 17.0 | % | 20.5 | % | ||||||
|
Consumer
Markets (b)
|
||||||||||||
|
Lubricant
sales gallons
|
158.8 | 169.2 | 167.1 | |||||||||
| Premium lubricants (percent of U.S. branded volumes) | 28.2 | % | 24.9 | % | 23.3 | % | ||||||
| Gross profit as a percent of sales | 32.0 | % | 23.0 | % | 24.8 | % | ||||||
|
Distribution
(b)
|
||||||||||||
|
Sales
per shipping day
|
$ | 12.0 | $ | 17.3 | $ | 15.9 | ||||||
|
Pounds
sold per shipping day
|
14.7 | 18.8 | 19.6 | |||||||||
| Gross profit as a percent of sales (d) | 10.0 | % | 7.8 | % | 7.9 | % | ||||||
|
(a)
|
Includes,
during 2009, amortization for purchased in-process research and
development of $5 million within both Functional Ingredients and Water
Technologies.
|
|
(b)
|
Sales
are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and operating
expenses.
|
|
(c)
|
Industry
segment results from November 14, 2008 forward include operations acquired
from Hercules Incorporated.
|
|
(d)
|
Distribution’s
gross profit as a percentage of sales for 2009 and 2008 include a LIFO
quantity credit of $15 million and $16 million,
respectively. There was no LIFO quantity credit for
2007.
|
As
previously discussed, Ashland’s financial performance during 2009 has been
severely impacted by significantly declining demand, a direct result of the
continued weakness in the global economy, especially within the North American
and European transportation and construction industries. Volume
levels were down across all businesses, including operations acquired from
Hercules on November 13, 2008, decreasing anywhere from 6% to 22% versus
2008. Despite this
pressure
Ashland has been implementing pricing improvements and has aggressively reduced
excess capacity to match current market demands, which has more than offset the
effects of the declining volume, as average selling prices are generally higher
versus a year ago. This coupled with significant reductions in
selling, general and administrative expenses from the cost-structure efficiency
programs previously described further improved operating income during
2009.
During
2008, Ashland’s financial performance was also hindered by modest declining
demand and significant raw material cost increases due to instability in raw
material markets as compared to 2007. This economic environment
created significant downward pressure on the gross profit margin of each
business segment, particularly within the Performance Materials, Valvoline and
Water Technologies businesses during 2008. Overall volume results
during 2008 for the businesses were mixed, with Water Technologies and Valvoline
reporting slight increases compared to 2007 while Distribution declined and
Performance Materials’ levels were unchanged.
Functional
Ingredients
Functional
Ingredients is one of the world’s largest producers of cellulose ethers and pale
wood rosin derivatives. It provides specialty additives and
functional ingredients that manage the physical properties of aqueous
(water-based) and nonaqueous systems. Many of its products are
derived from renewable and natural raw materials and perform in a wide variety
of applications.
Functional
Ingredients reported operating income of $36 million for 2009 since Ashland’s
acquisition of Hercules on November 13, 2008. During 2009, this
business incurred several significant charges that included: a
$30 million inventory fair value adjustment and a $5 million charge
for purchased in-process research and development, both associated with the
Hercules acquisition, as well as a severance charge of $10
million. Revenues reported were $812 million and included a
significant one-time sales transaction to an oilfield chemical supplier in the
amount of $17 million, which represented 2% of revenues and 5% of volume
for 2009. Sales per shipping day for 2009 was $3.7 million and
metric tons sold was 154.1 thousand. Gross profit margin of
26.7% was negatively impacted by 4.3 points due to the significant one-time
sales transaction and acquisition-related inventory charge described
above. Selling, general and administrative expenses incurred during
2009 were $152 million, which included the severance charge of $10 million
previously mentioned, and represented 19% of revenues. Research and
development expenses were $30 million, which included the $5 million
nonrecurring charge for purchased in-process research and
development.
Water
Technologies
Water
Technologies is a leading global producer of papermaking chemicals and a leading
specialty chemicals supplier to the pulp, paper, commercial and institutional,
food and beverage, chemical, mining and municipal markets. Its
process, water treatment and functional chemistries are used to improve
operational efficiencies, enhance product quality, protect plant assets, and
ensure environmental compliance.
In August
2009 Ashland sold its global marine services business known as Drew Marine, a
business unit of Water Technologies, to J.F. Lehman & Co. in a
transaction valued pretax at approximately $120 million before tax, which was
subsequently reduced by $4 million after giving affect to post-closing
adjustments related to working capital. The Drew Marine business, with
annual revenues of approximately $140 million a year, has approximately 325
employees, 28 offices and 98 stocking locations in 47
countries. The transaction resulted in a pretax gain of $56 million,
which is included in the net gain (loss) on divestitures caption of the
Statement of Consolidated Income. As part of this sale arrangement
Ashland has agreed to continue to manufacture certain products on behalf of Drew
Marine.
2009
compared to 2008
Water
Technologies reported operating income of $78 million for 2009 compared to $10
million reported during 2008. Significant volume declines related to
the global economic downturn were more than offset by reductions within selling,
general and administrative expenses, reductions to costs of goods, improved
product mix and pricing, and the addition of the former Hercules Paper
Technologies and Ventures business from the Hercules
acquisition. Current year results also included several charges
related to this acquisition that included: a $7 million
inventory fair value adjustment recorded within the cost of sales caption, a $5
million charge for purchased in-process research and development recorded within
the research and development expense caption and a severance charge of $4
million recorded within the selling, general and administrative
caption. Revenues increased 85% to $1,652 million compared to $893
million, a direct result of the Hercules acquisition, which contributed revenues
of $919 million. This increase in revenue was partially offset by a
$126 million, or 14%, decline in volume and a $63 million, or 7%, decline
attributable to foreign currency, while improved pricing and mix contributed an
additional $29 million, or 3%, as compared to 2008.
Gross
profit margin decreased 2.8 percentage points to 33.9% for 2009, partially due
to the $7 million of previously mentioned acquisition-related inventory
charges to cost of sales as well as inclusion of the former Hercules Paper
Technologies and Ventures business, which has historically been a lower gross
profit business as compared to the legacy Ashland business. The
acquired Hercules business contributed $257 million to gross profit while price
increases and mix
improvements
that reduced cost of goods sold, contributed an additional $47 million to
gross profit. Other items affecting the gross profit margin included
a $45 million decrease in volume and a $28 million decrease
attributable to foreign currency. Overall raw material inflation was
experienced early in 2009, with sequential moderation through the rest of the
year; however, this was more than offset by successfully negotiated full service
and municipal contracts that recaptured the increased raw material costs during
the period. Selling, general and administrative expenses increased
$138 million during 2009, as the $216 million increase from the
acquired operations of Hercules was partially offset by a $43 million reduction
in selling expense, principally related to operational cost savings from
restructuring the business subsequent to the Hercules acquisition, and a $19
million reduction attributable to foreign currency. Research and
development expenses increased $25 million during 2009, primarily due to a
$26 million increase from the acquired operations of Hercules, which included
the $5 million acquisition-related charge for purchased in-process research and
development.
2008
compared to 2007
Water
Technologies reported operating income of $10 million during 2008, a 38%
decrease compared to $16 million reported during 2007, as lower gross
profit margin and increased selling, general and administrative costs were the
primary factors in this decline. Revenues increased 9% to $893
million compared to $818 million during 2007, primarily due to increases of
approximately $64 million, or 8%, and $61 million, or 7%, in currency exchange
and volume, respectively. These increases were partially offset by an
$8 million, or 1%, decrease in price and a $42 million, or 5%, decrease as
a result of the reporting lag recorded in 2007.
Gross
profit margin decreased 2.5 percentage points to 36.7%. Despite this
decrease, gross profit increased $6 million from 2007 as currency exchange and
volume contributed increases of $24 million and $22 million, respectively, to
gross profit. These increases in gross profit were offset by cost
increases in raw materials and services of $25 million as well as a $15 million
decrease related to the reporting lag recorded during 2007. Selling,
general and administrative expenses increased $5 million during 2008 primarily
due to a $20 million increase in currency exchange and a $12 million decrease
from costs associated with the reporting lag recorded during
2007. Research and development expenses increased $7 million during
2008.
Performance
Materials
Performance
Materials is a global leader in unsaturated polyester resins and vinyl ester
resins. In addition, it provides customers with leading technologies
in gelcoats, pressure-sensitive and structural adhesives, and metal casting
consumables and design services.
2009
compared to 2008
Performance
Materials reported operating income of $1 million for 2009, a 98% decrease from
the $52 million reported during 2008. Significant volume declines
during 2009, primarily due to the global economic downturn, were partially
offset by lower selling, general and administrative
expenses. Revenues decreased 32% to $1,106 million compared to
$1,621 million in 2008. Decreases in volume of $463 million, or
29%, primarily due to significant weakness within the transportation,
construction, packaging and converting and metal casting markets, currency
exchange of $83 million, or 5%, and price declines of $51 million, or
3%, were the primary factors in the decrease in revenue. These
decreases were partially offset by revenues from the acquisition of Air Products
which contributed $82 million, or 5%, to 2009 revenues. Excluding the
effect of Air Products for 2009, revenue decreased 37%.
Gross
profit margin during 2009 remained unchanged at 17.0%. Pounds sold
per shipping day decreased 20% to 3.9 million during 2009, which caused a
$140 million decrease in gross profit, while the effect of foreign currency
decreased gross profit by $16 million. However, disciplined price
management and aggressive reductions in manufacturing costs from excess capacity
mitigated the gross profit margin decline from lost volume as price increases
coupled with raw material cost decreases added $55 million to gross profit,
which included a $14 million charge for plant closure costs. The
acquisition of Air Products contributed $13 million to gross
profit. Selling, general and administrative expenses decreased $38
million, or 18%, during 2009 as compared to 2008, primarily due to a $20 million
decrease related to headcount and other cost reduction programs and a
$17 million decline in reduced corporate allocations. These
decreases were partially offset by increased severance charges of $1 million
during 2009 compared to 2008. Research and development expenses
declined $6 million during 2009 compared to 2008, which was also primarily
related to headcount reductions and cost saving initiatives. Equity
and other income decreased $7 million during 2009 compared to 2008,
primarily due to reduced equity income from various joint ventures impacted by
the current global economic environment as well as a $3 million charge from
a joint venture that closed a manufacturing facility.
2008
compared to 2007
Performance
Materials reported operating income of $52 million during 2008, a 42% decrease
from the $89 million reported during 2007. Revenues increased 3%
to $1,621 million compared to $1,580 million during the prior
period. Increases in currency exchange of $88 million, or 6%, and
price of $45 million, or 3%, were the primary factors in the
increase
in revenue. In addition, the acquisition of Air Products in June 2008
contributed $34 million to 2008 revenues. These increases in revenue
were partially offset by volume and product mix decreases of $70 million, or 4%,
primarily as a result of weakness in the North American markets for the
Composites and Adhesives business unit, and a $56 million decrease related to
the reporting lag elimination recorded during 2007. The decrease in
volume and product mix caused operating income to decline by
$30 million.
Gross
profit margin during 2008 decreased 3.5 percentage points to 17.0% primarily due
to raw material cost increases of $69 million. These raw material
cost increases were not fully offset by price increases during 2008, causing
gross profit and operating income to decline by $24 million. The
decreases in gross profit related to price, volume and product mix were
partially offset by an increase from currency exchange of $16
million. Selling, general and administrative expenses increased $8
million during 2008 as an increase of $10 million and $8 million related to
corporate allocations and currency exchange, respectively, was partially offset
by a $7 million decrease in costs recorded from the reporting lag recorded
during 2007. Research and development expenses decreased $4 million
during 2008. Equity and other income increased $5 million during
2008 compared to 2007, primarily due to a $6 million increase in equity income
associated with joint ventures.
Consumer
Markets
Consumer
Markets, which includes the Valvoline® family of products and services, is a
leading innovator, marketer and supplier of high-performing automotive
lubricants, chemicals and appearance products. Valvoline, the world’s
first lubricating oil, is the number three passenger car motor oil brand, and
Valvoline Instant Oil Change represents the number two quick-lube franchise in
the United States.
2009
compared to 2008
Consumer
Markets reported record operating income of $252 million for 2009, a 204%
increase compared to $83 million reported during 2008. Profit
margin improvement was the primary factor in Consumer Markets’ record
performance as well as successful implementation of various cost saving
initiatives within operations and selling, general and administrative
costs. Revenues decreased 1% to $1,650 million compared to
$1,662 million in 2008. Increased pricing of $112 million, or
7%, and a favorable change in product mix of more premium lubricants sold during
2009 of $22 million, or 1%, partially offset volume declines in revenue of
$92 million, or 6%, as lubricant volume decreased to 158.8 million gallons
during 2009. Foreign currency declines also reduced revenue by an
additional $54 million, or 3%, as compared to 2008.
Gross
profit margin during 2009 increased 9.0 percentage points to
32.0%. The combination of price increases that began in fiscal 2008,
lower raw material costs and cost saving initiatives positively impacted results
causing an increase in gross profit of $170 million. This increase in
gross profit was offset by net volume and mix decreases reducing gross profit by
$7 million and foreign currency declines of $16 million compared to
2008. Selling, general and administrative expenses decreased
$18 million, or 6%, during 2009 primarily due to currency exchange
decreases of $11 million and reduced travel, entertainment and other
expenses of $13 million. Research and development expenses remained
unchanged during 2009 compared to 2008. Equity and other income
increased by $4 million during 2009, primarily due to increases in equity
income from various joint ventures.
2008
compared to 2007
Consumer
Markets reported operating income of $83 million during 2008, a 3% decrease
compared to $86 million reported during 2007. Revenues increased
9% to $1,662 million during 2008 compared to $1,525 million in
2007. Increases in pricing of $76 million, or 5%, and currency
exchange of $40 million, or 3%, contributed to the revenue
growth. In addition, revenue related to volume increased $49 million
as lubricant volume increased 1% to 169.2 million gallons during 2008 compared
to 2007, which resulted in an increase in gross profit and operating income of
$14 million. A change in the product mix sold during 2008
reduced revenue by $28 million compared to 2007.
Gross
profit margin during 2008 decreased 1.8 percentage points to
23.0%. Despite this decrease, gross profit increased $4 million from
the prior period as currency exchange contributed an increase of $11 million
while price increases did not fully offset increases in raw material costs,
causing a net $14 million decline in gross profit and operating
income. The remaining difference was due to fluctuations within
product mix, which caused gross profit and operating income to decline by $7
million. Selling, general and administrative expenses increased $7
million during the current period primarily due to currency exchange increases
of $8 million.
Distribution
Distribution
is a leading plastics and chemicals distributor in North America. It distributes
chemicals, plastics and composite raw materials in North America, as well as
plastics in Europe and China. Ashland Distribution also provides
environmental services in North America, including hazardous and nonhazardous
waste collection, recovery, recycling and disposal services.
2009
compared to 2008
Distribution
reported operating income of $52 million for 2009, a 2% increase compared to $51
million for 2008 as significant declines in volume, primarily due to the
weakness in North American industrial output, was offset by an improved gross
margin and successful cost savings initiatives within selling, general and
administrative expenses, which included some restructuring of excess
capacity. Revenues decreased 31% to $3,020 million compared to $4,374
million in 2008 primarily as a result of volume declines. Pounds sold
per shipping day decreased 22% to 14.7 million compared to
18.8 million in 2008, causing a $962 million decline in
revenues. Decreases in foreign currency of $92 million, or 2%, and
price of $300 million, or 7%, contributed to the overall revenues decline as
price increase announcements with customers during 2009 have been met with
limited success.
Gross
profit margin during 2009 increased 2.2 percentage points to 10.0% and benefited
from a favorable $15 million quantity LIFO adjustment. Raw material
price decreases resulted in a favorable contribution of $78 million to gross
profit, which includes the favorable quantity LIFO adjustment. This
increase was offset by a $109 million decrease in gross profit due to volume
declines and a $7 million decrease in currency exchange compared to
2008. Selling, general and administrative expenses decreased
$39 million, or 13%, during 2009 as compared to 2008, with decreases in
corporate allocations of $15 million, incentive compensation and salaries
of $16 million, travel and entertainment of $6 million and currency
exchange of $7 million as the primary factors. These decreases were
partially offset by severance charges of $4 million incurred during
2009.
2008
compared to 2007
Distribution
reported operating income of $51 million during 2008, a 24% increase from the
$41 million reported during 2007. Revenues increased 9% to $4,374
million compared to $4,031 million in the prior period. Price
increases, primarily in certain chemicals and plastics, were the primary factor
in revenue growth causing a $446 million, or 11%, increase with currency
exchange increases adding an additional $97 million, or 2%. These
increases during 2008 were offset by a $154 million decrease in volume, as
pounds sold per shipping day decreased 4% to 18.8 million compared to 19.6
million in 2007, causing a decline in the gross profit and operating income of
$13 million. The reporting lag recorded during 2007 resulted in an
additional $46 million decrease in revenue.
Gross
profit margin during the current period decreased 0.1 percentage point to 7.8%
and benefited from a favorable LIFO quantity credit of $16
million. Despite this decline, gross profit increased $22 million
compared to 2007 as price increases offset raw material cost increases,
contributing $34 million to gross profit and operating
income. Selling, general and administrative expenses increased
$12 million, or 4%, during 2008 primarily due to increased charges for
incentive compensation of $11 million.
Unallocated
and other
Unallocated
and other costs were $29 million for 2009 compared to income of $17 million
for 2008 and costs of $16 million in 2007. During 2009, Ashland
began fully allocating significant actual corporate costs as opposed to budgeted
expenditures which was utilized in prior periods, except for certain significant
company-wide restructuring activities, such as the current restructuring plan
related to the Hercules acquisition described in Note D of Notes to Consolidated
Financial Statements, and other costs or adjustments that relate to former
businesses that Ashland no longer operates. Cost components for 2009
consisted of $31 million for severance and plant closure charges associated
with the ongoing integration and reorganization of the Hercules acquisition and
$3 million in due diligence costs associated with investment opportunities and
other charges, which were partially offset by a currency gain on an intercompany
loan of $5 million.
Income
components for 2008 included lower incentive compensation and direct support
costs that were not reallocated back to the businesses that was partially offset
by an $8 million charge for costs associated with Ashland’s joint venture with
Cargill to manufacture bio-based propylene glycol, which had been suspended due
to persistently high glycerin input costs and other costs related to growth
opportunities. In addition to the ongoing costs that typically occur
each year related to formerly owned businesses, 2008 included an
$11 million adjustment from favorable experiences related to Ashland’s
self-insurance program.
Fiscal
2007 included $9 million of income from reduced corporate expenditures and
other costs as well as a $25 million charge for costs associated with Ashland’s
voluntary severance offer. Ashland’s voluntary severance offer was
initiated as a result of the APAC divestiture in August 2006. As a
result of the divestiture, 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 2007. In total, Ashland accepted voluntary severance offers
from 172 employees under the program. As a result, a $25 million
charge was recorded for severance, pension and other postretirement benefit
costs during fiscal 2007. The termination dates for employees
participating in the program were completed and paid in fiscal
2008.
FINANCIAL
POSITION
Liquidity
Ashland’s
cash flows from operating, investing and financing activities, as reflected in
the Statements of Consolidated Cash Flows, are summarized as
follows.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
(used) provided by:
|
||||||||||||
|
Operating
activities from continuing operations
|
$ | 1,027 | $ | 478 | $ | 189 | ||||||
|
Investing
activities from continuing operations
|
(2,115 | ) | (418 | ) | (6 | ) | ||||||
|
Financing
activities from continuing operations
|
573 | (70 | ) | (1,016 | ) | |||||||
|
Discontinued
operations
|
(2 | ) | (8 | ) | (95 | ) | ||||||
|
Effect
of currency exchange rate changes on cash and cash
equivalents
|
(17 | ) | 7 | 5 | ||||||||
|
Net
decrease in cash and cash equivalents
|
$ | (534 | ) | $ | (11 | ) | $ | (923 | ) | |||
Operating
activities
Cash
flows generated from operating activities from continuing operations, a major
source of Ashland’s liquidity, amounted to $1,027 million in 2009, $478 million
in 2008 and $189 million in 2007. The increased cash generated during
2009 primarily reflects a cash improvement in operating assets and liabilities
as compared to 2008 and 2007, primarily attributable to changes within accounts
receivable, inventory and trade and other payables as a result of Ashland’s
increased focus on working capital management throughout the
company. These elements of working capital generated
$344 million of cash inflow during 2009 compared to a cash inflow of $193
million in 2008 and a cash outflow of $234 million in 2007.
Net
income of $71 million for 2009 included a noncash adjustment for depreciation
and amortization of $329 million as well as significant charges from the
Hercules acquisition and other items that did not occur in 2008 and 2007,
including an inventory fair value adjustment and purchased in-process research
and development amortization of $37 million and $10 million,
respectively, debt issuance cost amortization of $52 million, a currency swap
loss of $54 million and a $32 million loss on auction rate
securities. These significant charges were offset by the gain
associated with the Drew Marine sale of $56 million. Operating
cash flows for 2008 and 2007 included net income of $167 million and $230
million, respectively, and a noncash adjustment of $145 million and $133
million, respectively, for depreciation and amortization. The
increase in depreciation and amortization expense as compared to 2009 relates to
the additional depreciation and amortization associated with the valuation of
the acquired Hercules operations and other acquisition related
amortization. The depreciation and amortization from these assets
will be included in operations on an ongoing basis through the remainder of
their useful lives as determined and as part of the purchase accounting fair
value estimates discussed in Note B of the Notes to Consolidated Financial
Statements.
Ashland
contributed $47 million to its qualified pension plans in 2009, compared with
$25 million in 2008 and $58 million in 2007 and paid income taxes of $49
million during 2009, compared to $53 million in 2008 and $25 million in
2007. Cash receipts for interest income were $21 million in 2009, $40
million in 2008 and $59 million in 2007, while cash payments for interest
expense amounted to $198 million in 2009, $10 million in 2008 and
$10 million in 2007. Cash flows from discontinued operations,
consisting primarily of cash flows from APAC, amounted to a cash outflow of
$2 million in 2009, $8 million in 2008 and $95 million in
2007.
Investing
activities
Cash used
in investing activities was $2,115 million for 2009 as compared to $418 million
and $6 million used by investing activities in 2008 and 2007,
respectively. The significant cash investing activities for 2009
included cash outflows of $2,080 million for the purchase of Hercules’
operations in November 2008, $95 million for the settlement of currency
interest rate swap hedges related to the acquisition and $174 million for
capital expenditures. These significant cash investing activities
were offset by sales of auction rate securities during 2009 resulting in cash
proceeds of $73 million and proceeds from the FiberVisions and Drew Marine
sales of $114 million. Significant cash investing activities for 2008
included net purchases of available-for-sale securities of $120 million,
$205 million for capital expenditures and $129 million for purchased
operations offset by cash proceeds of $26 million associated with the MAP
Transaction. Significant cash investing activities for 2007 included
$154 million for capital expenditures and $75 million for the Northwest Coatings
acquisition offset by $196 million in cash inflow from available-for-sale
securities.
Financing
activities
Cash
provided by financing activities was $573 million for 2009 as compared to a $70
million and a $1,016 million cash usage for financing activities in 2008 and
2007, respectively. Significant cash financing activities for 2009
included cash
inflows
of $2,628 million associated with short-term and long-term financing secured
with Bank of America Securities LLC, Scotia Capital (USA) Inc. and other lenders
for the acquisition of Hercules, including the subsequent 9.125% Senior Notes
due 2017 issued in May 2009 for which the proceeds were used to extinguish the
bridge loan facility under the interim credit agreement discussed further in
Note I of the Notes to Consolidated Financial Statements. This cash
inflow for 2009 was partially offset by cash used for the extinguishment of
certain debt instruments that Hercules held as of the closing date of the
acquisition, the extinguishment of the bridge loan facility, previously
discussed, and other debt prepayments made subsequent to the Hercules
acquisition that totaled $1,881 million. In addition,
$162 million in debt issue costs were paid in connection with securing the
financing for the Hercules acquisition and the subsequent 9.125% Senior Notes
due 2017 issued to replace the bridge loan facility. In total, as a
result of Ashland’s focus and efficient execution on cash generation and savings
opportunities, Ashland was able to reduce debt by approximately $1 billion of
the debt associated with the financing of the Hercules acquisition during
2009.
Cash
dividends paid during 2009 were $.30 per common share and totaled $22 million, a
$47 million reduction as compared to 2008 as a result of the reduction in the
$1.10 per common share dividend paid during 2008 and 2007. Fiscal
2007 included a significant cash outflow of $743 million for cash dividends
paid and $288 million for repurchase of common stock which are both
discussed further in the “Capital resources” discussion.
Cash
flow metrics
At
September 30, 2009, working capital (current assets minus current
liabilities, excluding long-term debt due within one year) amounted to $960
million, compared to $1,817 million at the end of 2008. Ashland’s
working capital is affected by its use of the LIFO method of inventory valuation
that valued inventories below their replacement costs by $125 million at
September 30, 2009, $200 million at September 30, 2008. Liquid
assets (cash, cash equivalents and accounts receivable) amounted to 112% of
current liabilities at September 30, 2009, compared to 189% at September
30, 2008. The decrease in both working capital and liquid assets in
2009 is primarily the result of cash on hand used for the financing of the
Hercules acquisition.
The
following summary reflects Ashland’s cash, investment securities and debt as of
September 30, 2009 and 2008.
|
September
30
|
September
30
|
|||||||
|
(In
millions)
|
2009
|
2008
|
||||||
|
Short-term
debt
|
$ | 23 | $ | - | ||||
|
Long-term
debt (including current portion)
|
1,590 | 66 | ||||||
|
Total
debt
|
$ | 1,613 | $ | 66 | ||||
|
Cash
and cash equivalents
|
$ | 352 | $ | 886 | ||||
|
Auction
rate securities
|
$ | 170 | $ | 243 | ||||
The
scheduled aggregate maturities of debt by fiscal year for the next five years
are as follows: $76 million in 2010, $66 million in 2011,
$64 million in 2012, $95 million in 2013 and $536 million in
2014. Total borrowing capacity remaining under the $400 million
revolving credit facility was $264 million, after reduction of the facility by
$136 million for letters of credit outstanding at September 30, 2009 with
an additional $198 million of borrowing capacity available through the accounts
receivable securitization facility. Total short-term debt at
September 30, 2009 was $23 million, which primarily related to draws on
revolving credit facilities among international operations. No
short-term debt was outstanding at September 30, 2008.
The
current portion of long-term debt was $53 million at September 30, 2009 and
$21 million at September 30, 2008. Debt subject to variable interest
rates as of September 30, 2009 was $803 million. A 100-basis point
increase or decrease in interest rates at September 30, 2009 would have resulted
in an $8 million increase or decrease in interest expense. The
sensitivity analysis assumes an instantaneous 100-basis point move in interest
rates from their current levels, with all other variables held
constant. Based on Ashland’s current debt structure included in Note
I of the Notes to Consolidated Financial Statements and assuming interest rates
remain somewhat stable, future interest expense could range from approximately
$170 million to $190 million based on applicable fixed and floating interest
rates.
As a
result of the financing and subsequent debt issued to complete the acquisition
of Hercules, Standard & Poor’s and Moody’s Investor Services downgraded
Ashland’s corporate credit rating to BB- and Ba2, respectively.
Covenants
related to debt agreements
Ashland
is now subject to certain restrictions from various debt
covenants. These covenants include certain affirmative covenants such
as various internal certifications, maintenance of property and applicable
insurance coverage as well as negative covenants that include financial covenant
restrictions, these include: leverage and fixed charge coverage
ratios,
total net
worth and capital expenditure limitations. The permitted consolidated
leverage ratio at any time during any period of four fiscal quarters for Ashland
is as follows under the credit facility.
|
Maximum
consolidated
leverage
ratio
|
||||||||||||||
|
For
fiscal quarters ending:
|
||||||||||||||
|
Funding
date through September 30, 2009
|
3.75:1.00
|
|||||||||||||
|
December
31, 2009 through September 30, 2010
|
3.50:1.00
|
|||||||||||||
|
December
31, 2010 through September 30, 2011
|
3.00:1.00
|
|||||||||||||
|
December
31, 2011 through September 30, 2012
|
2.75:1.00
|
|||||||||||||
|
December
31, 2012 and each fiscal quarter thereafter
|
2.50:1.00
|
|||||||||||||
The
following describes Ashland’s September 2009 calculation of the consolidated
leverage ratio per the senior credit agreement as previously disclosed in a Form
8-K filed on November 21, 2008 and reconciliation of Consolidated EBITDA (as
defined by the senior credit agreement, as amended) to net
income. Ashland has included certain non-U.S. GAAP information below
to assist in the understanding of various financial debt covenant
calculations.
|
|
Covenant
|
|||||||||||||||||||||||
|
(In
millions, except ratios) (a)
|
Q1'09
|
Q2'09
|
Q3'09
|
Q4'09
|
Total
|
ratio
|
||||||||||||||||||
|
Debt/EBITDA
|
||||||||||||||||||||||||
|
Consolidated
EBITDA
|
$ | 155 | $ | 227 | $ | 266 | $ | 304 | $ | 952 | ||||||||||||||
|
Debt
|
2,473 | 2,266 | 2,021 | 1,642 | 1,642 | |||||||||||||||||||
|
Debt/EBITDA
|
1.7 | x | 3.75 | x | ||||||||||||||||||||
|
max.
|
||||||||||||||||||||||||
|
Reconciliation
of Consolidated EBITDA:
|
||||||||||||||||||||||||
|
(In
millions)
|
Q1'09
|
Q2'09
|
Q3'09
|
Q4'09
|
||||||||||||||||||||
|
Net
(loss) income
|
$ | (119 | ) | $ | 48 | $ | 50 | $ | 93 | |||||||||||||||
|
Key
items excluded (b)
|
82 | (1 | ) | 3 | - | |||||||||||||||||||
|
Consolidated
interest charges
|
35 | 56 | 64 | 63 | ||||||||||||||||||||
|
Income
taxes (benefit) expense
|
(1 | ) | 9 | 40 | 39 | |||||||||||||||||||
|
Depreciation
and amortization
|
63 | 93 | 88 | 85 | ||||||||||||||||||||
|
Hercules
stub-period results (c)
|
34 | - | - | - | ||||||||||||||||||||
|
Other
nonrecurring or noncash charges (d)
|
61 | 22 | 21 | 24 | ||||||||||||||||||||
|
Total
consolidated EBITDA
|
$ | 155 | $ | 227 | $ | 266 | $ | 304 | ||||||||||||||||
|
Reconciliation
of Debt:
|
||||||||||||||||||||||||
|
(In
millions)
|
Q1'09
|
Q2'09
|
Q3'09
|
Q4'09
|
||||||||||||||||||||
|
Total
debt (long-term and short-term)
|
$ | 2,468 | $ | 2,262 | $ | 1,993 | $ | 1,613 | ||||||||||||||||
|
Defeased
debt
|
(31 | ) | (31 | ) | (13 | ) | (13 | ) | ||||||||||||||||
|
Guarantees
(bank and third party)
|
36 | 35 | 41 | 42 | ||||||||||||||||||||
| $ | 2,473 | $ | 2,266 | $ | 2,021 | $ | 1,642 | |||||||||||||||||
|
(a)
|
All
numbers adjusted to reflect terminology and calculation methodology
governing the senior credit agreement, included in a Form 8-K filed on
November 21, 2008, as amended.
|
|
(b)
|
Excludes
certain income or costs that have been specifically identified within the
senior credit agreement, as
amended.
|
|
(c)
|
In
accordance with the senior credit agreement, Hercules’ financial results
from October 1, 2008 through November 13, 2008, which is the period of
time during Ashland’s first quarter that it did not own Hercules, have
been included within this
calculation.
|
|
(d)
|
Includes
certain nonrecurring or noncash transactions, including restructuring and
integration charges, defined within the senior credit
agreement. Allowable restructuring and integration charges are
capped, per the senior credit agreement, as amended, not to exceed $80
million during the three fiscal year period ending September 30,
2011. Ashland incurred approximately $65 million of
qualifying restructuring and integration expenses in
2009.
|
The
permitted consolidated fixed charge coverage ratio as of the end of any fiscal
quarter for Ashland is as follows under Ashland’s senior credit
agreement.
|
Minimum
consolidated
fixed
charge
coverage
ratio
|
||||||||||||||
|
For
fiscal quarters ending:
|
||||||||||||||
|
Funding
date through September 30, 2010
|
1.25:1.00
|
|||||||||||||
|
December
31, 2010 through each fiscal quarter thereafter
|
1.50:1.00
|
|||||||||||||
The
following describes Ashland’s September 2009 calculation of the fixed charge
coverage ratio per the senior credit agreement included in a Form 8-K filed on
November 21, 2008:
|
(In
millions, except ratios) (a)
|
Q1'09
|
Q2'09
|
Q3'09
|
Q4'09
|
Total
|
Covenant
ratio
|
||||||||||||||||||
|
Fixed
charge coverage
|
||||||||||||||||||||||||
|
Consolidated
EBITDA
|
$ | 155 | $ | 227 | $ | 266 | $ | 304 | $ | 952 | ||||||||||||||
|
Capital
expenditures
|
57 | 42 | 27 | 67 | 193 | |||||||||||||||||||
|
Adjusted
interest expense
|
51 | 45 | 45 | 43 | 184 | |||||||||||||||||||
|
Scheduled
debt payments
|
- | 17 | 17 | 11 | 45 | |||||||||||||||||||
|
Adjusted
dividend payment
|
5 | 5 | 6 | 6 | 22 | |||||||||||||||||||
|
Fixed
charge coverage ratio
|
3.0 | x | 1.25 | x | ||||||||||||||||||||
|
min.
|
||||||||||||||||||||||||
|
(a)
|
All
numbers adjusted to reflect terminology and calculation methodology
governing the senior credit agreement, included in a Form 8-K filed on
November 21, 2008, as amended.
|
Under
Ashland’s financing facilities, the minimum consolidated net worth covenant at
the end of any fiscal quarter ending after December 31, 2008 must not be less
than 85% of Ashland’s consolidated net worth as of December 31, 2008, after
giving effect to any purchase accounting adjustments relating to the Hercules
acquisition subsequent to December 31, 2008, increased on a cumulative basis for
each subsequent quarter commencing with January 1, 2009 by an amount equal to
50% of Ashland’s U.S. GAAP reported net income (to the extent positive with no
deduction for net losses) plus 100% of net cash proceeds of any issuance of
equity interests (other than disqualified equity interests). As of
September 30, 2009 Ashland’s consolidated net worth covenant was $3,609 million
versus the minimum consolidated net worth covenant of $3,155 million, a
difference of $454 million. As outlined above, this difference would
be adversely impacted by any future operating losses, impairment (including
goodwill, intangible assets and property, plant and equipment), pension
remeasurement, severance or other related charges that reduce Ashland’s
consolidated net worth.
Ashland
projects that cash flows from operations and other available financial resources
such as cash on hand and revolving credit should be sufficient to meet investing
and financing requirements to enable Ashland to comply with the covenants and
other terms of each respective financing facility. These model
projections are based on various assumptions that include, but are not limited
to: operational results, working capital cash generation, capital
expenditures, pension funding requirements and tax payment and
receipts. Any change in assumptions that would affect these cash flow
projections by $100 million would have an approximate .2x effect on the
consolidated leverage ratio and a .4x effect on the fixed charge coverage
ratio. Any change in debt of $100 million would affect the
consolidated leverage ratio by approximately .1x.
Ashland
is committed to fulfilling its debt obligations under the credit
agreement. If an Event of Default (as defined in the senior credit
agreement) were to occur and continue, the lenders under the credit agreement
would have the right to declare the unpaid principal, interest and fees
immediately due and payable. Ashland would also be required to cash
collateralize any letter of credit obligations outstanding and the bank could
exercise any other rights granted to them within the senior credit
agreement. If this were to occur, Ashland would seek to amend the
agreement. There is no guaranty that the lenders would grant this
amendment. As of September 30, 2009, Ashland is in compliance with
all covenants imposed by Ashland’s credit facilities.
Auction
Rate Securities
At
September 30, 2008, Ashland held at par value $275 million student loan auction
rate securities for which there was not an active market with consistent
observable inputs. 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 that time the market for auction rate securities has
failed to achieve equilibrium. As a result, Ashland determined that a
temporary adjustment of $32 million to the par value of these high quality
instruments was required as of September 30, 2008 until the liquidity of the
market returns.
During
the first quarter of 2009, Ashland liquidated $20 million (par value) auction
rate securities for $18 million in cash proceeds and recognized a loss of
$2 million, which was the recorded book value of this instrument. As
a result of this sale, as well as Ashland’s current debt structure following the
Hercules acquisition and the ongoing impact from the current global economic
downturn, Ashland determined in the first quarter of 2009 that it no longer had
the intent to hold these instruments until their maturity date. As a
result, Ashland recorded the remaining $30 million unrealized loss as a
permanent realized loss in the other expenses caption of the Consolidated
Statement of Income. A full valuation allowance was established for
this tax benefit at December 31, 2008 because for tax purposes Ashland did not
have capital gains to offset this capital loss.
During
2009, Ashland sold $83 million (par value) auction rate securities for $73
million in cash proceeds which approximated book value. In addition,
during 2009, Ashland signed an agreement with UBS Financial Services, Inc.
agreeing to sell a $5 million (par value) auction rate instrument at its par
value on or before June 30, 2010. As a result, Ashland recorded a
minimal unrealized gain associated with this settlement.
Ashland’s
current estimate of fair value for auction rate securities is based on various
internal discounted cash flow models and relevant observable market prices and
quotes. The assumptions within the models include credit quality,
liquidity, estimates on the probability of each valuation model and the impact
due to extended periods of maximum auction rates. 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 and $2 million, respectively. At September 30, 2009
and 2008, auction rate securities carrying value totaled $170 million (par
value of $192 million), and $243 million (par value of $275 million) and
were classified as noncurrent assets in the Condensed Consolidated Balance
Sheet. Due to the 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 beyond a twelve-month
period. As a result, Ashland has classified these instruments as
long-term auction rate securities at September 30, 2009 and 2008 in Ashland’s
Condensed Consolidated Balance Sheet.
Capital
resources
During
2009, Ashland increased total debt by $1,547 million to $1,613 million and
stockholders’ equity increased by $382 million to $3,584 million. The
increase in debt was a result of the $2,600 million in secured financing
from Bank of America Securities LLC, Scotia Capital (USA) Inc. and other lenders
for the acquisition of Hercules, originally consisting of a $400 million
revolving credit facility, a $400 million term loan A facility, an
$850 million term loan B facility, a $200 million accounts receivable
securitization facility and a $750 million bridge loan, which was
subsequently extinguished in May 2009 upon the issuance of the $650 million
9.125% Senior Notes due 2017. The total debt drawn upon the closing
of the completed merger was $2,300 million which included amounts used to fund
the $594 million extinguishment of certain debt instruments that Hercules
held as of the closing date. The remaining Hercules debt assumed as
part of the acquisition was fair valued at $205 million as of the closing
date.
The
increase in stockholders’ equity was primarily due to the
following: $450 million for the issuance of common shares for the
acquisition of Hercules, $38 million from issuance of common shares under
employee savings, stock incentive and other plans, and net income of
$71 million. These increases were partially offset by regular
cash dividends of $22 million and other comprehensive losses of
$153 million, primarily related to pension losses. Debt as a
percent of capital employed was 31.0% at September 30, 2009 compared to
2.0% at September 30, 2008.
As part
of the financing arrangements to acquire Hercules, Ashland is now subject to the
following capital expenditure limits, which can be increased by any qualifying
carryover from prior years: $300 million in fiscal year 2009, $250
million in fiscal year 2010, $330 million in fiscal year 2011, $360 million in
fiscal year 2012, $370 million in fiscal year 2013 and $375 million in fiscal
year 2014. In accordance with the senior credit agreement, 50% of any
capital expenditure amount set forth above that is not expended in the fiscal
year for which it is permitted above may be carried over for expenditure in the
next following fiscal year. During 2009, Ashland’s total capital
expenditures per the senior credit agreement, totaled $193 million, which
was more than $100 million below the required covenant and $127 million below
the combined actual capital expenditures of $320 million for the twelve
months ended September 30, 2008 for both companies. In accordance
with the senior credit agreement, an additional $53 million will be added
to the $250 million minimum requirement for 2010 to arrive at the total capital
expenditure covenant. During 2009, Ashland recorded $174 million for
capital expenditures. Prior to Ashland’s acquisition of Hercules on
November 13, 2008, the Hercules businesses incurred capital expenditures of
$19 million from October 1 through November 13, 2008 which, in accordance
with the senior credit agreement, are included in the covenant calculation for
fiscal year 2009. Ashland is currently forecasting $200 million of
capital expenditures for fiscal 2010.
Property,
plant and equipment additions averaged $178 million during the last three years
and are summarized in Note Q of the Notes to Consolidated Financial
Statements. During 2009, Ashland used $2,080 million in capital to
obtain Hercules’ Aqualon and Paper Technologies and Ventures
businesses. During 2008 and 2007, Ashland used capital to acquire
several businesses within Performance Materials, including Air Products in 2008
and Northwest Coatings in 2007.
A summary
of the capital employed in Ashland’s current operations as of the end of the
last three years follows.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Capital
employed
|
||||||||||||
|
Functional
Ingredients
|
$ | 2,684 | $ | - | $ | - | ||||||
|
Water
Technologies
|
1,663 | 333 | 359 | |||||||||
|
Performance
Materials
|
750 | 795 | 682 | |||||||||
|
Consumer
Markets
|
588 | 485 | 501 | |||||||||
|
Distribution
|
374 | 521 | 672 | |||||||||
During
2009, the Board of Directors of Ashland decreased the quarterly cash dividend to
7.5 cents per share. This dividend was a reduction from the 27.5
cents per share paid quarterly during 2008 and 2007. In total,
Ashland’s annual cash outflow for dividends decreased by $47 million compared to
2008 and 2007. In conjunction with Ashland’s new debt facilities,
Ashland is now subject to various covenants that may restrict certain future
payments, which could include quarterly dividend payments, although Ashland does
not anticipate that will occur.
Ashland
did not repurchase any shares during 2009 or 2008, but did repurchase 4.7
million shares for $288 million during 2007. The stock repurchase
actions during 2007 were consistent with certain representations of intent made
to the Internal Revenue Service with respect to the transfer of
MAP. As part of the completed merger to acquire all of the
outstanding shares of Hercules in November 2008, Ashland issued 10.5 million
shares. See Note B of the Notes to Consolidated Financial Statements
for additional details regarding the acquisition. At September 30,
2009 and 2008, 9.8 million and 8.4 million common shares, respectively,
were reserved for issuance under stock incentive and deferred compensation
plans.
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
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. This amount was accrued as dividends payable in the
Consolidated Balance Sheet at September 30, 2006 and was subsequently paid
during 2007. 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 M of Notes
to Consolidated Financial Statements for a description of Ashland’s share
repurchase programs.
Contractual
obligations and other commitments
The
following table aggregates Ashland’s obligations and commitments, which includes
the former Hercules businesses, to make future payments under existing contracts
at September 30, 2009. Contractual obligations for which the
ultimate settlement of quantities or prices are not fixed and determinable have
been excluded.
|
(In
millions)
|
Total
|
2010
|
2011-
2012
|
2013-
2014
|
Later
Years
|
|||||||||||||||
|
Contractual
obligations
|
||||||||||||||||||||
|
Raw
material and service contract purchase obligations (a)
|
$ | 2,661 | $ | 634 | $ | 1,356 | $ | 671 | $ | - | ||||||||||
|
Employee
benefit obligations (b)
|
571 | 174 | 86 | 87 | 224 | |||||||||||||||
|
Operating
lease obligations (c)
|
305 | 67 | 108 | 71 | 59 | |||||||||||||||
|
Debt (d)
|
1,613 | 76 | 130 | 631 | 776 | |||||||||||||||
|
Unrecognized
tax benefits
(e)
|
125 | - | - | - | 125 | |||||||||||||||
|
Total
contractual obligations
|
$ | 5,275 | $ | 951 | $ | 1,680 | $ | 1,460 | $ | 1,184 | ||||||||||
|
Other
commitments
|
||||||||||||||||||||
|
Letters
of credit (f)
|
$ | 136 | $ | 136 | $ | - | $ | - | $ | - | ||||||||||
|
(a)
|
Includes
raw material and service contracts where minimal committed quantities and
prices are fixed.
|
|
(b)
|
Includes
estimated funding of Ashland’s qualified U.S. and non-U.S. pension plans
for 2009, as well as projected benefit payments through 2019 under
Ashland’s unfunded pension and other postretirement benefit
plans. See Note O of Notes to Consolidated Financial Statements
for additional information.
|
|
(c)
|
Includes
leases for office buildings, retail outlets, transportation equipment,
warehouses and storage facilities and other equipment. For
further information, see Note K of Notes to Consolidated Financial
Statements.
|
|
(d)
|
Excludes
expected interest charges due to the inherent limitations in projecting
future variable interest rates and unscheduled debt
prepayments. Capitalized lease obligations are not significant
and are included in debt. For further information, see Note I
of Notes to Consolidated Financial Statements.
|
|
(e)
|
Due
to uncertainties in the timing of the effective settlement of tax
positions with respect to taxing authorities, Ashland is unable to
determine the timing of payments related to noncurrent unrecognized tax
benefits, including interest and penalties. Therefore, these
amounts were principally included in the “Later Years”
column.
|
|
(f)
|
Ashland
issues various types of letters of credit as part of its normal course of
business. For further information, see Note I of Notes to
Consolidated Financial Statements.
|
OFF-BALANCE
SHEET ARRANGEMENTS
As part
of its normal course of business, Ashland is a party to various financial
guarantees and other commitments. These arrangements involve elements
of performance and credit risk that are not included in the consolidated balance
sheets. The possibility that Ashland would have to make actual cash
expenditures in connection with these obligations is largely dependent on the
performance of the guaranteed party, or the occurrence of future events that
Ashland is unable to predict. Ashland has reserved the approximate
fair value of these guarantees in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP).
NEW
ACCOUNTING PRONOUNCEMENTS
For a
discussion and analysis of recently issued accounting pronouncement and its
impact on Ashland, see Note A of Notes to Consolidated Financial
Statements.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
The
preparation of Ashland’s Consolidated Financial Statements in conformity with
U.S. GAAP 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 (including goodwill and other intangible assets), employee
benefit obligations, income taxes, other liabilities 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. Management has reviewed the estimates
affecting these items with the Audit Committee of Ashland’s Board of
Directors.
Long-lived
assets
Tangible
assets
The cost
of property, plant and equipment is depreciated by the straight-line method over
the estimated useful lives of the assets. Buildings are depreciated
principally over 25 to 35 years and machinery and equipment principally over 4
to 15 years. Such costs are periodically reviewed for recoverability
when impairment indicators are present. Such indicators include,
among other factors, operating losses, unused capacity, market value declines
and technological obsolescence. Recorded values of property, plant
and equipment that are not expected to be recovered through undiscounted future
net cash flows are written down to current fair value, which generally is
determined from estimated discounted future net cash flows (assets held for use)
or net realizable value (assets held for sale). Asset impairment
charges are included within the selling, general and administrative expense
caption of the Statements of Consolidated Income and were $3 million in 2009,
$2 million in 2008 and $15 million in 2007. Asset impairment
charges for 2009 exclusively relate to corporate aircraft that were moved to
assets held for sale upon the shutdown of the corporate aviation department
during the year. Asset impairment charges for 2007 include an $11
million charge related to PathGuard®
pathogen control equipment. As a result of Water Technologies’
decision to withdraw from this market during 2007, these assets were written
down to the approximate fair value of comparable assets. Total
depreciation expense on property, plant and equipment for 2009, 2008 and 2007
was $261 million, $134 million and $122 million,
respectively. Included in depreciation expense for 2009 was
$17 million in accelerated depreciation related to the closure of plant
facilities included within the cost of sales and operating expenses caption of
the Statements of Consolidated Income. Capitalized interest for 2009
was $3 million and was not significant for 2008 and 2007.
Intangible
assets
In
accordance with U.S. GAAP, Ashland reviews goodwill and other intangible assets
for impairment either annually or when events and circumstances indicate an
impairment may have occurred. This annual assessment is performed as
of July 1 and consists of Ashland determining each reporting unit’s current
fair value compared to its current carrying value. Ashland has
determined its reporting units for allocation of goodwill include the Functional
Ingredients, Water Technologies, Performance Materials, Consumer Markets and
Distribution reportable segments. Within the Performance Materials
reportable segment, because further discrete financial information is provided
and management regularly reviews this information, this reportable segment is
further broken down into the Casting Solutions and Composites and Adhesives
reporting units.
When
externally quoted market prices of Ashland’s reporting units are not readily
available, Ashland makes various estimates and assumptions in determining the
estimated fair values of those units. Historically, Ashland has used
a market
multiples
valuation technique. Fair values were based principally on EBITDA
(earnings before interest, taxes, depreciation and amortization) multiples of
industry peer group companies for each of these reporting units and, as deemed
necessary, a discounted cash flow model. Based upon recent market
conditions, Ashland determined during 2008 that a discounted cash flow model was
a more representative valuation model to currently determine a business’ fair
value. Discounted cash flow models are highly reliant on various
assumptions. Significant assumptions Ashland utilized in these models
included: projected business results and future industry direction,
long-term growth factors (ranging from 4% to 5%) and Ashland’s weighted-average
cost of capital, which was determined to be 10.5%. Ashland uses
assumptions that it deems to be conservative estimates of likely future events
and compares the total fair values of each reporting unit to Ashland’s market
capitalization, and implied control premium, to determine if the fair values are
reasonable compared to external market indicators. Subsequent changes
in these key assumptions could affect the results of future goodwill impairment
reviews.
In
conjunction with the July 1 annual assessment of goodwill, Ashland’s valuation
techniques did not indicate any impairment. However, the estimated
fair values of Functional Ingredients and Water Technologies reporting units did
indicate results that were close to their carrying values, although Ashland
believes that this result is reasonable given all or a significant portion of
these reporting units were purchased in 2009. A negative 1% change in
either the long-term growth factor or weighted-average cost of capital
assumptions for these two reporting units would have resulted in a fair value
at, or slightly below, Ashland’s current carrying value of these reporting
units. For the remaining reporting units, the estimated fair values
exceeded the carrying value of these reporting units by a significant
amount.
Ashland
did compare and assess the total fair values of the reporting units to Ashland’s
market capitalization at September 30, 2009, including the implied control
premium, to determine if the fair values are reasonable compared to external
market indicators. While Ashland’s current market capitalization
total was slightly below its current carrying value, the discounted cash flow
models for each reporting unit summed together exceeded Ashland’s carrying value
by approximately 25% as of Ashland’s annual impairment testing
date. Ashland believes its use of significant assumptions within its
valuation models are reasonable estimates of likely future
events. Because the fair value results for each reporting unit did
not indicate a potential impairment existed, Ashland did not recognize any
goodwill impairment during 2009, 2008 and 2007.
Ashland’s
assessment of an impairment charge on any of these assets classified currently
as having indefinite lives, including goodwill, could change in future periods
if any or all of the following events were to occur with respect to a particular
reporting unit: divestiture decision, negative change in Ashland’s
weighted-average cost of capital rates, growth rates or other assumptions,
continued economic deterioration that is more severe or of a longer duration
than anticipated, or another significant economic event. Significant
future charges for impairments could impact Ashland’s ability to comply with the
minimum consolidated net worth covenant, which is disclosed further in Note I of
Notes to Consolidated Financial Statements.
As of
September 30, 2009, Ashland recorded goodwill of approximately $1,806 million in
connection with the purchase of Hercules in November 2008. Functional
Ingredients recorded $1,030 million of goodwill and Water Technologies recorded
$515 million of goodwill associated with the transaction. In
connection with the goodwill associated with this acquisition, Ashland
determined that a certain amount of the goodwill should be allocated to all
reporting units because each reporting unit will benefit from synergies related
to the acquisition that will increase these businesses’ overall reported
profitability. Ashland calculated the increased value each reporting
unit is expected to receive from the estimated synergy savings in determining
the appropriate amount of goodwill to allocate for this transaction, which
totaled the following: $97 million for Performance Materials,
$85 million for Consumer Markets and $79 million for Distribution.
Employee
benefit obligations
Ashland
and its subsidiaries sponsor contributory and noncontributory qualified and
non-qualified defined benefit pension plans that cover a majority of employees
in the United States and in a number of other countries. Benefits
under these plans generally are based on employees’ years of service and
compensation during those years of service. In addition, the
companies also sponsor unfunded postretirement benefit plans, which provide
health care and life insurance benefits for eligible employees who retire or are
disabled. Retiree contributions to Ashland’s health care plans are
adjusted periodically, and the plans contain other cost-sharing features, such
as deductibles and coinsurance. Life insurance plans generally are
noncontributory. For further information, see Note O of Notes to
Consolidated Financial Statements.
During
2009, in conjunction with the purchase of Hercules, Ashland assumed $207 million
and $109 million of net liabilities associated with qualified and non-qualified
defined benefit pension plans and postretirement plans,
respectively. The assumed Hercules pension plan had a projected
benefit obligation of $1,521 million as of the acquisition date.
Certain
key assumptions are used to measure the plan obligations of company-sponsored
defined benefit pension plans and postretirement benefit
plans. Ashland’s pension and other postretirement obligations and
annual expense calculations are based on a number of key assumptions including
the discount rate at which obligations can be effectively settled, the
anticipated rate of compensation increase, the expected long-term rate of return
on plan assets and certain employee-related
factors,
such as turnover, retirement age and mortality. Because Ashland’s
retiree health care plans contain various caps that limit Ashland’s
contributions and because medical inflation is expected to continue at a rate in
excess of these caps, the health care cost trend rate has no material impact on
Ashland’s postretirement health care benefit costs. While no such
caps exist for the assumed Hercules postretirement plan, the current health care
cost trend is not expected to have a material impact on Ashland’s postretirement
health care benefit costs.
Ashland
developed the discount rate used to determine the present value of its
obligations under the U.S. pension and postretirement health and life plans by
matching the stream of benefit payments from the plans to the Mercer Pension
Discount Yield Curve Spot Rates. Ashland uses this approach to
reflect the specific cash flows of these plans for determining the discount
rate. The discount rate determined as of September 30, 2009 was 5.80%
for the U.S. pension plans and 5.46% for the postretirement health and life
plans. Non-U.S. pension plans followed a similar process based on
financial markets in those countries where Ashland provides a defined benefit
pension plan. The weighted-average discount rate for Ashland’s U.S.
and non-U.S. pension plans combined was 5.82% as of September 30,
2009.
Ashland’s
expense under both U.S. and non-U.S. pension plans is determined using the
discount rate as of the beginning of the fiscal year, which amounted to a
weighted-average rate of 7.81% for 2009, 6.16% for 2008 and 5.66% for
2007. The rates used for the postretirement health and life plans
were 7.78% for 2009, 5.96% for 2008 and 5.64% for 2007. The 2010
expense for the pension plans will be based on a weighted-average discount rate
of 5.82%, while 5.50% will be used for the postretirement health and life
plans.
The
weighted-average rate of compensation increase assumptions were 3.73% for 2009,
3.74% for 2008 and 3.74% for 2007. The compensation increase
assumptions for the U.S. plans were 3.75% for 2009, 3.75% for 2008 and 3.75% for
2007. The rate of the compensation increase assumption for the U.S.
plans will remain at 3.75% in determining Ashland’s pension costs for
2010.
The
weighted-average long-term expected rate of return on assets was assumed to be
7.97% in 2009, 7.62%% in 2008 and 7.58% in 2007. The long-term
expected rate of return on assets for the U.S. plans was assumed to be 8.25% in
2009, 7.75% in 2008 and 7.75% in 2007. For 2009, the U.S. pension
plan assets generated an actual return of 15.9%, compared to a loss of 18.5% in
2008 and an actual return of 15.3% in 2007. However, the expected
return on plan assets is designed to be a long-term assumption, and actual
returns will be subject to considerable year-to-year
variances. Ashland has generated compounded annual investment returns
of 7.3% and 5.3% on its U.S. pension plan assets over the last five-year and
ten-year periods. In 2008, 17% of the pension portfolio was shifted
from equity investments to alternative assets that historically have had a
higher rate of return than equity investments, prompting an increase in the
expected return on U.S. plan assets to 8.25% in determining Ashland’s pension
costs for 2009. Ashland estimates total fiscal 2010 pension costs for
U.S. and non-U.S. pension plans to be approximately $90 million.
Shown
below are the estimated increases in pension and postretirement expense that
would have resulted from a one percentage point change in each of the
assumptions for each of the last three years.
|
(In
millions)
|
2009
|
2008
|
(a) |
2007
|
(a) | |||||||
|
Increase
in pension costs from
|
||||||||||||
|
Decrease
in the discount rate
|
$ | 19 | $ | 16 | $ | 24 | ||||||
|
Increase
in the salary adjustment rate
|
9 | 7 | 9 | |||||||||
|
Decrease
in the expected return on plan assets
|
23 | 15 | 13 | |||||||||
|
Increase
in other postretirement costs from
|
||||||||||||
|
Decrease
in the discount rate
|
3 | 2 | 2 | |||||||||
Income
taxes
Ashland
is subject to income taxes in the United States and numerous foreign
jurisdictions. Significant judgment in the forecasting of taxable
income using historical and projected future operating results is required in
determining Ashland’s provision for income taxes and the related assets and
liabilities. The provision for income taxes includes income taxes
paid, currently payable or receivable, and those deferred. Under U.S.
GAAP, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities, and are
measured using enacted tax rates and laws that are expected to be in effect when
the differences reverse. Deferred tax assets are also recognized for
the estimated future effects of tax loss carryforwards. The effect on
deferred taxes of changes in tax rates is recognized in the period in which the
enactment date changes. Valuation allowances are established when
necessary on a jurisdictional basis to reduce deferred tax assets to the amounts
expected to be realized. In the event that the actual outcome of
future tax consequences differs from Ashland’s estimates and assumptions due to
changes or future events such as tax legislation, geographic mix of earnings,
completion of tax audits or earnings repatriation plans, the resulting change to
the provision for income taxes could have a material affect on the Consolidated
Statement of Income and Consolidated Balance Sheet.
As a
result of the Hercules acquisition during 2009, significant historical tax
positions and structures related to this company have been combined within
Ashland. Some of these previous tax positions and structures from
Hercules have required a complete reassessment regarding certain of Ashland’s
pre-acquisition tax positions and structures. As such, material
changes in certain tax matters may occur in the future based on deviations from
Ashland’s current estimates and assumptions in combining these tax positions and
structures.
In
June 2006, U.S. GAAP prescribed a new 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. This also
provided guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Ashland
adopted these provisions effective October 1, 2007. The
cumulative effect of adoption resulted in a reduction to the October 1, 2007
opening retained earnings balance of less than $1 million. For
additional information, see Note L.
Asbestos-related
litigation
Ashland
and Hercules, a wholly owned subsidiary of Ashland, have liabilities from claims
alleging personal injury caused by exposure to asbestos. To assist in
developing and annually updating independent reserve estimates for future
asbestos claims and related costs given various assumptions, Ashland retained
Hamilton, Rabinovitz & Associates, Inc. (HR&A). The
methodology used by HR&A to project future asbestos costs is based largely
on recent experience, including claim-filing and settlement rates, disease mix,
enacted legislation, open claims, and litigation defense and claim settlement
costs. The claim experience of Ashland and Hercules are separately
compared to the results of previously conducted third party epidemiological
studies estimating the number of people likely to develop asbestos-related
diseases. Those studies were undertaken in connection with national
analyses of 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. See Note P of Notes to
Consolidated Financial Statements for additional information.
Ashland
asbestos-related litigation
The
claims alleging personal injury caused by exposure to asbestos asserted against
Ashland result primarily from indemnification obligations undertaken in 1990 in
connection with the sale of Riley Stoker Corporation (Riley), a former
subsidiary. 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.
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,
which generally approximates the mid-point of the estimated range of exposure
from model results. Ashland reviews this estimate and related
assumptions quarterly and annually updates the results of a non-inflated,
non-discounted approximate 50-year model developed with the assistance of
HR&A.
During
the most recent update completed during 2009, it was determined that the reserve
adjustment for asbestos claims should be increased by $5
million. Total reserves for asbestos claims were $543 million at
September 30, 2009 compared to $572 million at September 30,
2008.
Excluding
the Hercules asbestos claims further described below, 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.
For the
Ashland asbestos-related obligations, 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 62% of the estimated
receivables from insurance companies are expected to be due from domestic
insurers, of which approximately 83% have a credit rating of B+ or higher by A.
M. Best, as of September 30, 2009. 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, whose insurance policy
obligations have been transferred to a Berkshire Hathaway
entity. Ashland discounts this piece of the receivable based upon the
projected timing of the receipt of cash from those insurers unless likely
settlement amounts can be determined.
At
September 30, 2009, Ashland’s receivable for recoveries of litigation defense
and claim settlement costs from insurers amounted to $422 million (excluding the
Hercules receivable for asbestos claims), of which $64 million relates to
costs previously paid. Receivables from insurers amounted to $458
million at September 30, 2008. During 2009, the model used for
purposes of valuing the asbestos reserve described above, and its impact on
valuation of future recoveries from
insurers,
was updated. This model update along with potential settlement
adjustments caused an additional $8 million net increase in the receivable for
probable insurance recoveries.
Hercules
asbestos-related litigation
Hercules,
a wholly owned subsidiary of Ashland, has liabilities from claims alleging
personal injury caused by exposure to asbestos. Such claims typically
arise from alleged exposure to asbestos fibers from resin encapsulated pipe and
tank products which were sold by one of Hercules’ former subsidiaries to a
limited industrial market. 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.
In
November 2008, Ashland completed its acquisition of Hercules. At that
time, Hercules’ recorded reserve for asbestos claims was $233 million for
indemnity costs. Hercules’ accounting policy in recording reserves
for asbestos claims was to reserve at the lowest level of an estimated range of
exposure for indemnity claims, excluding estimates of future litigation defense
costs. Ashland’s accounting policy in recording reserves for asbestos
claims is to include amounts for the best estimate of projected indemnity and
litigation defense costs, which generally approximates the mid-point of the
estimated range of exposure from model results. As a result, Ashland
recorded a $105 million increase to the asbestos reserve for Hercules to include
projected defense costs. To do so, Ashland utilized several internal
models that it employs to estimate defense costs associated with asbestos
claims.
During
2009, Ashland included the Hercules claims within its annual assessment of these
matters, which includes running various non-inflated, non-discounted approximate
50-year models developed with the assistance of HR&A and determining from
the range of estimates in the models the amount it believes to be the best
estimate of future payments for litigation defense and claim settlement
costs. Based on Ashland’s assessment of the best estimate of the
range of exposure from the most recent model results, an additional $156 million
increase was recorded, which was accounted for as an adjustment to Hercules’
opening balance sheet because the adjustment related to claims that had been
incurred as of the acquisition date.
Total
reserves for Hercules asbestos claims were $484 million at September 30,
2009. Due to the number and diversity of Hercules asbestos claims
outstanding as of the acquisition date and how reliant the 50-year models are on
the accuracy of the claim data, Ashland’s review of the underlying claim files
as part of transitioning to a standardized claims management approach remains in
process. Ashland anticipates this will be finalized during the first
part of fiscal 2010. Once the review of the underlying claim files is
completed, a final assessment of the Hercules asbestos claims liability will be
determined and any subsequent adjustment to the opening balance sheet will be
recorded during 2010 in the period determined. The amounts recorded
as of September 30, 2009 represent Ashland's best estimate of the liability
based on the current status of the underlying claim files review.
As of
Ashland’s acquisition date of Hercules, all of the cash previously recovered and
placed into a trust from the settlements with certain of Hercules’ insurance
carriers had been exhausted. With the addition of estimated defense
and indemnity costs, the total Hercules asbestos reserve exceeded the amount
needed to obtain reimbursements pursuant to coverage-in-place agreements with
certain other insurance carriers. Accordingly, Ashland initially
estimated at the acquisition date the amount of future projected costs that will
be reimbursable by such insurance using a similar methodology as performed on
the historical Ashland asbestos liability and recorded a $35 million receivable
within the noncurrent asbestos insurance receivable caption of the Consolidated
Balance Sheet. Upon completion of the annual update during 2009, the
receivable was increased by $84 million reflecting the increase in
liability from the updated model incorporated within Ashland’s complete
valuation process. As of September 30, 2009, the receivables from
insurers amounted to $118 million. This estimated receivable
exclusively consists of domestic insurers, of which approximately 97% have a
credit rating of B+ or higher by A.M. Best, as of September 30,
2009.
Asbestos
litigation cost projection
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 that the asbestos reserves for Ashland and
Hercules represent the best estimate within a range of possible
outcomes. As a part of the process to develop these estimates of
future asbestos costs, a range of long-term cost models was
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 in various current approximate
50-year models 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 $800 million for the
Ashland asbestos-related litigation and approximately $800 million for the
Hercules asbestos-related litigation (or approximately $1.6 billion in the
aggregate), 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.
Environmental
remediation
Ashland
and Hercules are 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
September 30, 2009, such locations included 94 waste treatment or disposal sites
where Ashland and/or Hercules have been identified as a potentially responsible
party under Superfund or similar state laws, 162 current and former operating
facilities (including certain operating facilities conveyed to MAP) and about
1,220 service station properties, of which 160 are being actively
remediated.
Ashland’s
reserves for environmental remediation and asset retirement obligations amounted
to $221 million at September 30, 2009 compared to $149 million at September
30, 2008, of which $169 million at September 30, 2009 and $112 million at
September 30, 2008 were classified in other noncurrent liabilities on the
Consolidated Balance Sheets. As a result of the Hercules acquisition
on November 13, 2008, Ashland assumed all Hercules’ environmental and asset
retirement obligation contingencies. Hercules’ obligations assumed by
Ashland were $100 million, which includes an increase of $22 million for
different remediation approaches than previously assumed under Hercules’
valuation models.
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 discounts certain environmental sites and
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 September 30, 2009 and 2008, Ashland’s recorded
receivable for these probable insurance recoveries was $35 million and $40
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 $15 million in
2009, $11 million in 2008 and $15 million in 2007. Environmental
remediation expense, net of insurance receivables, was $13 million in 2009, $7
million in 2008 and $7 million in 2007.
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 is approximately $375 million, which
includes the Hercules sites. No individual remediation location is
material, as the largest reserve for any site is less than 10% of the
remediation reserve.
OUTLOOK
The past
year has been extraordinary for Ashland and the global
economy. Ashland has taken aggressive steps throughout the year in
realigning and resizing the cost structures of its businesses to match current
global demand. In addition, Ashland integrated the operations and
businesses from the Hercules acquisition, which has created a global specialty
chemical company with significant scale and strong positions within the markets
our products serve. Through this period of significant global demand
deterioration and unprecedented transition within Ashland, the company was able
to generate over $1 billion dollars in operating cash flow generation, primarily
from the business operations and working capital management. This
cash was principally used to pay down Ashland’s debt that was borrowed during
2009 to finance the Hercules acquisition.
Ashland’s
significant business redesign, integration of Hercules and debt reduction during
2009 has significantly changed the company’s operating leverage and repositioned
it for enhanced earnings growth moving forward. With the reduction of
$355 million from Ashland’s cost structure, two-thirds of which is permanent,
volume recovery within each business should increase margins and profitability
above historical levels. In addition, Ashland now operates a diverse
group
of
businesses with operations in less cyclical but growing markets, such as
personal care, pharmaceuticals and water treatment, which should provide
stability through economic downturns. However, it is Ashland’s
operations in some of the more cyclical industries, such as transportation and
construction, which may provide disproportionate revenue and earnings growth
opportunities as these industries recover from the current economic
downturn.
Ashland’s
cash flow will continue to be a significant focus during 2010. As a
result, Ashland anticipates capital expenditures to remain below historical
levels at approximately $200 million. In November 2009 Ashland
contributed $100 million in Ashland Common Stock to the qualified U.S.
pension plan, which has reduced Ashland’s expected pension expense and future
funding requirements during 2010. As a result of this contribution,
Ashland anticipates that its pension expense will increase only $15 million
during 2010, which is based on Ashland’s current accumulated benefit funding
status of 83% as of September 30, 2009, giving affect for the $100 million stock
contribution. In addition, Ashland expects its blended interest rate
on outstanding debt to average approximately 8.8% in 2010, which is expected to
require cash interest payments of approximately $140 million. While
significant cash generation has occurred in the past two years from Ashland’s
3.5 percentage point decrease in trade working capital, Ashland anticipates
this level will be maintained or slightly improved during 2010.
During a
turbulent and unsettled global economy Ashland has demonstrated its ability to
generate improved operating results and strong cash flow, while significantly
rescaling the overall company. Ashland’s current operating leverage
and strong cash flow generation performance has positioned it well to capitalize
on future periods of increased global demand, which should produce sustained
revenue and earnings growth.
EFFECTS
OF INFLATION AND CHANGING PRICES
Ashland’s
financial statements are prepared on the historical cost method of accounting
and, as a result, do not reflect changes in the purchasing power of the U.S.
dollar. Monetary assets (such as cash, cash equivalents and accounts
receivable) lose purchasing power as a result of inflation, while monetary
liabilities (such as accounts payable and indebtedness) result in a gain,
because they can be settled with dollars of diminished purchasing
power. Ashland’s monetary liabilities currently exceed its monetary
assets, leaving it less exposed to the effects of future inflation than in the
past, when that relationship was reversed. However, given the recent
consistent stability of inflation in the U.S. in the past several years as well
as forward economic outlooks, current inflationary pressures seem
moderate.
Certain
of the industries in which Ashland operates are capital-intensive, and
replacement costs for its plant and equipment generally would exceed their
historical costs. Accordingly, depreciation and amortization expense
would be greater if it were based on current replacement
costs. However, because replacement facilities would reflect
technological improvements and changes in business strategies, such facilities
would be expected to be more productive than existing facilities, mitigating at
least part of the increased expense. Ashland uses the LIFO method to
value a portion of its inventories to provide a better matching of revenues with
current costs. However, LIFO values such inventories below their
replacement costs.
FORWARD-LOOKING
STATEMENTS
Management’s
Discussion and Analysis (MD&A) 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. The statements include those made
with respect to Ashland’s operating performance and Ashland’s acquisition of
Hercules. These expectations are based upon a number of assumptions,
including those mentioned within the MD&A. Performance estimates
are also based upon internal forecasts and analyses of current and future market
conditions and trends, management plans and strategies, operating efficiencies
and economic conditions, such as prices, supply and demand, cost of raw
materials, weather 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 also include those with respect
to Ashland’s strategic transformation, including the risk that the benefits
anticipated from the Hercules transaction will not be fully realized; the
substantial indebtedness Ashland has incurred to finance the acquisition of
Hercules may impair Ashland’s financial condition; the restrictive covenants
under the debt instruments may hinder the successful operation of Ashland’s
business; and other risks that are described in filings made by Ashland with the
Securities and Exchange Commission (SEC). 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. Other factors, uncertainties
and risks affecting Ashland are contained in Risks and Uncertainties in Note A
to the Notes to Consolidated Financial Statements and in Item 1A of this annual
report on Form 10-K. Ashland undertakes no obligation to subsequently
update or revise the forward-looking statements made in this Form 10-K to
reflect events or circumstances after the date of this Form 10-K.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Ashland
regularly uses foreign currency derivative instruments to manage its exposure to
certain transactions denominated in foreign currencies. All
derivative instruments are recognized as either assets or liabilities on the
balance sheet and are measured at fair value. Changes in the fair
value of all derivatives are recognized immediately in income unless the
derivative qualifies as a hedge of future cash flows. Gains and
losses related to a hedge are either recognized in income immediately to offset
the gain or loss on the hedged item, or deferred and recorded in the
stockholders’ equity section of the Consolidated Balance Sheets as a component
of accumulated other comprehensive income and subsequently recognized in the
Statements of Consolidated Income when the hedged item affects net
income. The ineffective portion of the change in fair value of a
hedge is recognized in income immediately. At September 30, 2009 and
2008, Ashland had no derivative contracts that qualified for hedge
accounting. Credit risks arise from the possible inability of
counterparties to meet the terms of their contracts, but exposure is limited to
the replacement value of the contracts. Ashland further minimizes
this credit risk through internal monitoring procedures and as of
September 30, 2009 does not have significant credit risk on open derivative
contracts. The potential loss from a hypothetical 10% adverse change
in foreign currency rates on Ashland’s open foreign currency derivative
instruments at September 30, 2009 would not significantly affect Ashland’s
consolidated financial position, results of operations, cash flows or
liquidity. Ashland did not transact or have open any hedging
contracts with respect to commodities or any related raw material requirements
for the year ended September 30, 2009. See Note G of Notes to
Consolidated Financial Statements for additional information regarding
derivative instruments.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL SCHEDULE
| Page | |
| Management’s report on internal control over financial reporting .................................................................................................................................................................... | F-2 |
| Reports of independent registered public accounting firm ................................................................................................................................................................................. | F-3 |
|
Consolidated
Financial Statements:
|
|
| Statements of Consolidated Income ................................................................................................................................................................................................................. | F-5 |
| Consolidated Balance Sheets ........................................................................................................................................................................................................................... | F-6 |
| Statements of Consolidated Stockholders’ Equity......................................................................................................................................................................................... | F-7 |
| Statements of Consolidated Cash Flows ........................................................................................................................................................................................................ | F-8 |
| Notes to Consolidated Financial Statements .................................................................................................................................................................................................. | F-9 |
| Quarterly financial information ................................................................................................................................................................................….............................................. | F-48 |
|
Consolidated
financial schedule:
|
|
| Schedule II – Valuation and qualifying accounts .......................................................................................................................................................................................... | F-48 |
| Five-year selected financial information .................................................................................................................................................................................................................. | F-49 |
F-1
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management
is responsible for the preparation and integrity of the Consolidated Financial
Statements and other financial information included in this annual report on
Form 10-K. Such financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. Accounting principles are selected and information is
reported which, using management’s best judgment and estimates, present fairly
Ashland’s consolidated financial position, results of operations and cash
flows. The other financial information in this annual report on
Form 10-K is consistent with the Consolidated Financial
Statements.
Ashland’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Ashland’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of Ashland’s Consolidated Financial
Statements. Ashland’s internal control over financial reporting is
supported by a code of business conduct which summarizes our guiding values such
as obeying the law, adhering to high ethical standards and acting as responsible
members of the communities where we operate. Compliance with that
Code forms the foundation of our internal control systems, which are designed to
provide reasonable assurance that Ashland’s assets are safeguarded and its
records reflect, in all material respects, transactions in accordance with
management’s authorization. The concept of reasonable assurance is
based on the recognition that the cost of a system of internal control should
not exceed the related benefits. Management believes that adequate
internal controls are maintained by the selection and training of qualified
personnel, by an appropriate division of responsibility in all organizational
arrangements, by the establishment and communication of accounting and business
policies, and by internal audits.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements and even when determined to be effective, can
only provide reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The
Board, subject to stockholder ratification, selects and engages the independent
auditors based on the recommendation of the Audit Committee. The
Audit Committee, composed of directors who are not members of management,
reviews the adequacy of Ashland’s policies, procedures, controls and risk
management strategies, the scope of auditing and other services performed by the
independent auditors, and the scope of the internal audit
function. The Committee holds meetings with Ashland’s internal
auditor and independent auditors, with and without management present, to
discuss the findings of their audits, the overall quality of Ashland’s financial
reporting and their evaluation of Ashland’s internal controls. The
report of Ashland’s Audit Committee can be found in the Company’s 2009 Proxy
Statement.
Management
assessed the effectiveness of Ashland’s internal control over financial
reporting as of September 30, 2009. Management conducted its
assessment utilizing the framework described in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management
believes that Ashland maintained effective internal control over financial
reporting as of September 30, 2009.
PricewaterhouseCoopers
LLP, an independent registered public accounting firm, has audited and reported
on the Consolidated Financial Statements of Ashland Inc. and consolidated
subsidiaries and the effectiveness of Ashland’s internal control over financial
reporting. The reports of the independent auditors are contained in
this Annual Report.
/s/ James
J. O’Brien
James J.
O’Brien
Chairman
of the Board and Chief Executive Officer
/s/ Lamar
M. Chambers
Lamar M.
Chambers
Senior
Vice President and Chief Financial Officer
November
23, 2009
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors and Stockholders
Ashland
Inc. and consolidated subsidiaries
In our
opinion, the accompanying consolidated balance sheet and the related statements
of consolidated income, stockholders’ equity and cash flows present fairly, in
all material respects, the financial position of Ashland Inc. and its
subsidiaries at September 30, 2009, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule for the year ended
September 30, 2009 listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2009, based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express opinions
on these financial statements, on the financial statement schedule, and on the
Company’s internal control over financial reporting based on our integrated
audit. We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audit of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Cincinnati,
Ohio
November
23, 2009
F-3
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors and Stockholders
Ashland
Inc. and consolidated subsidiaries
We have
audited the accompanying consolidated balance sheets of Ashland Inc. and
consolidated subsidiaries as of September 30, 2008, and the related statements
of consolidated income, stockholders’ equity, and cash flows for each of the two
years in the period ended September 30, 2008. Our audits also
included the financial statement schedule as of September 30, 2008 and 2007 and
for the years then ended, listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of Ashland Inc. and
consolidated subsidiaries’ management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Ashland Inc. and
consolidated subsidiaries at September 30, 2008, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended September 30, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule as of September 30, 2008 and 2007 and for the years then ended, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
As
discussed in Note A to the Consolidated Financial Statements, effective October
1, 2007, Ashland Inc. and consolidated subsidiaries adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109. Also as
discussed in Note A to the Consolidated Financial Statements, effective
September 30, 2007, Ashland Inc. and consolidated subsidiaries adopted Statement
of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R).
/s/ Ernst
& Young LLP
Ernst
& Young LLP
Cincinnati,
Ohio
November
25, 2008
F-4
|
Ashland
Inc. and Consolidated Subsidiaries
|
||||||||||||
|
Statements
of Consolidated Income
|
||||||||||||
|
Years
Ended September 30
|
||||||||||||
|
(In
millions except per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
and operating revenues
|
$ | 8,106 | $ | 8,381 | $ | 7,785 | ||||||
|
Costs
and expenses
|
||||||||||||
|
Cost
of sales and operating expenses
|
6,317 | 7,056 | 6,447 | |||||||||
|
Selling,
general and administrative expenses
|
1,341 | 1,118 | 1,126 | |||||||||
|
Research
and development expenses
|
96 | 48 | 45 | |||||||||
| 7,754 | 8,222 | 7,618 | ||||||||||
|
Equity and other income
- Notes A & F
|
38 | 54 | 49 | |||||||||
|
Operating
income
|
390 | 213 | 216 | |||||||||
|
Net
gain (loss) on divestitures - Note C
|
59 | 20 | (3 | ) | ||||||||
|
Net
interest and other financing (expense) income - Note I
|
(205 | ) | 28 | 46 | ||||||||
|
Other
expenses
|
(86 | ) | - | - | ||||||||
|
Income
from continuing operations before income taxes
|
158 | 261 | 259 | |||||||||
|
Income
tax expense - Note L
|
80 | 86 | 58 | |||||||||
|
Income
from continuing operations
|
78 | 175 | 201 | |||||||||
|
(Loss)
income from discontinued operations (net of income taxes) - Note
E
|
(7 | ) | (8 | ) | 29 | |||||||
|
Net
income
|
$ | 71 | $ | 167 | $ | 230 | ||||||
|
Earnings
per share - Note A
|
||||||||||||
|
Basic
|
||||||||||||
|
Income
from continuing operations
|
$ | 1.08 | $ | 2.78 | $ | 3.20 | ||||||
|
(Loss)
income from discontinued operations
|
(0.10 | ) | (0.13 | ) | 0.46 | |||||||
|
Net
income
|
$ | 0.98 | $ | 2.65 | $ | 3.66 | ||||||
|
Diluted
|
||||||||||||
|
Income
from continuing operations
|
$ | 1.07 | $ | 2.76 | $ | 3.15 | ||||||
|
(Loss)
income from discontinued operations
|
(0.11 | ) | (0.13 | ) | 0.45 | |||||||
|
Net
income
|
$ | 0.96 | $ | 2.63 | $ | 3.60 | ||||||
See Notes to Consolidated Financial
Statements.
F-5
|
Ashland
Inc. and Consolidated Subsidiaries
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
At
September 30
|
||||||||
|
(In
millions)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 352 | $ | 886 | ||||
|
Accounts
receivable (less allowances for doubtful accounts of
|
||||||||
|
$38
million in 2009 and $33 million in 2008) - Note A
|
1,404 | 1,441 | ||||||
|
Inventories
- Note A
|
554 | 476 | ||||||
|
Deferred
income taxes - Note L
|
115 | 97 | ||||||
|
Other
current assets
|
46 | 79 | ||||||
|
Current
assets held for sale - Note C
|
2 | 47 | ||||||
| 2,473 | 3,026 | |||||||
|
Noncurrent
assets
|
||||||||
|
Auction
rate securities - Note G
|
170 | 243 | ||||||
|
Goodwill
- Note H
|
2,220 | 283 | ||||||
|
Intangibles
- Note H
|
1,204 | 109 | ||||||
|
Asbestos
insurance receivable (noncurrent portion) - Note P
|
510 | 428 | ||||||
|
Deferred
income taxes - Note L
|
161 | 153 | ||||||
|
Other
noncurrent assets - Note J
|
596 | 388 | ||||||
|
Noncurrent
assets held for sale - Note C
|
17 | 46 | ||||||
| 4,878 | 1,650 | |||||||
|
Property, plant and
equipment - Note A
|
||||||||
|
Cost
|
||||||||
|
Land
|
258 | 82 | ||||||
|
Buildings
|
723 | 552 | ||||||
|
Machinery
and equipment
|
2,317 | 1,497 | ||||||
|
Construction
in progress
|
195 | 140 | ||||||
| 3,493 | 2,271 | |||||||
|
Accumulated
depreciation and amortization
|
(1,397 | ) | (1,176 | ) | ||||
| 2,096 | 1,095 | |||||||
| $ | 9,447 | $ | 5,771 | |||||
|
Liabilities and
Stockholders’ Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Short-term
debt - Note I
|
$ | 23 | $ | - | ||||
|
Current
portion of long-term debt - Note I
|
53 | 21 | ||||||
|
Trade
and other payables
|
949 | 918 | ||||||
|
Accrued
expenses and other liabilities
|
541 | 278 | ||||||
|
Current
liabilities held for sale - Note C
|
- | 13 | ||||||
| 1,566 | 1,230 | |||||||
|
Noncurrent
liabilities
|
||||||||
|
Long-term
debt (noncurrent portion) - Note I
|
1,537 | 45 | ||||||
|
Employee
benefit obligations - Note O
|
1,214 | 344 | ||||||
|
Asbestos
litigation reserve (noncurrent portion) - Note P
|
956 | 522 | ||||||
|
Other
noncurrent liabilities - Note J
|
590 | 428 | ||||||
| 4,297 | 1,339 | |||||||
|
Stockholders’ equity -
Notes M and N
|
||||||||
|
Common
stock, par value $.01 per share, 200 million shares
authorized
|
||||||||
|
Issued
- 75 million shares in 2009 and 63 million shares in 2008
|
1 | 1 | ||||||
|
Paid-in
capital
|
521 | 33 | ||||||
|
Retained
earnings
|
3,185 | 3,138 | ||||||
|
Accumulated
other comprehensive (loss) income
|
(123 | ) | 30 | |||||
| 3,584 | 3,202 | |||||||
| $ | 9,447 | $ | 5,771 | |||||
See Notes to Consolidated Financial
Statements.
F-6
|
Ashland
Inc. and Consolidated Subsidiaries
|
||||||||||||||||||||
|
Statements
of Consolidated Stockholders' Equity
|
||||||||||||||||||||
|
(In
millions)
|
Common
stock
|
Paid-in
capital
|
Retained
earnings
|
Accumulated
other
comprehensive
income
(loss)
|
(a) |
Total
|
||||||||||||||
|
Balance
at September 30, 2006
|
$ | 1 | $ | 240 | $ | 2,899 | $ | (44 | ) | $ | 3,096 | |||||||||
|
Total
comprehensive income (b)
|
230 | 184 | 414 | |||||||||||||||||
|
Regular
dividends, $1.10 per common share
|
(1 | ) | (68 | ) | (69 | ) | ||||||||||||||
|
Issued
728,839 common shares under
|
||||||||||||||||||||
|
stock
incentive and other plans (c)
|
44 | 44 | ||||||||||||||||||
|
Adoption
of FAS 158, net of $27 million tax benefits
|
(43 | ) | (43 | ) | ||||||||||||||||
|
Repurchase
of 4,712,000 common shares - Note M
|
(267 | ) | (21 | ) | (288 | ) | ||||||||||||||
|
Balance
at September 30, 2007
|
1 | 16 | 3,040 | 97 | 3,154 | |||||||||||||||
|
Total
comprehensive income (loss) (b)
|
167 | (67 | ) | 100 | ||||||||||||||||
|
Regular
dividends, $1.10 per common share
|
(69 | ) | (69 | ) | ||||||||||||||||
|
Issued
151,821 common shares under
|
||||||||||||||||||||
|
stock
incentive and other plans (c)
|
17 | 17 | ||||||||||||||||||
|
Balance
at September 30, 2008
|
1 | 33 | 3,138 | 30 | 3,202 | |||||||||||||||
|
Total
comprehensive income (loss) (b)
|
71 | (153 | ) | (82 | ) | |||||||||||||||
|
Regular
dividends, $.30 per common share
|
(22 | ) | (22 | ) | ||||||||||||||||
|
Issuance
of common shares - Note M
|
450 | 450 | ||||||||||||||||||
|
Issued
1,353,880 common shares under
|
||||||||||||||||||||
|
stock
incentive and other plans (c) (d)
|
42 | 42 | ||||||||||||||||||
|
Other
|
(4 | ) | (2 | ) | (6 | ) | ||||||||||||||
|
Balance
at September 30, 2009
|
$ | 1 | $ | 521 | $ | 3,185 | $ | (123 | ) | $ | 3,584 | |||||||||
|
|
| (a) |
At
September 30, 2009 and 2008, the accumulated other comprehensive (loss)
income (after-tax) of ($123) million for 2009 and $30 million for 2008 was
comprised of unfunded pension and postretirement obligations of $462
million for 2009 and $107 million for 2008, net unrealized translation
gains of $339 million for 2009 and $157 million for 2008 and net
unrealized losses on investment securities of $20 million during
2008.
|
|||||||||||||
| (b) |
Reconciliations
of net income to total comprehensive (loss) income follow.
|
|||||||||||||
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||||
|
Net
income
|
$ | 71 | $ | 167 | $ | 230 | ||||||||
|
Pension
and postretirement obligation adjustment, net of tax
|
(355 | ) | (51 | ) | 101 | |||||||||
|
Unrealized
translation gain, net of tax
|
182 | 4 | 82 | |||||||||||
|
Net
unrealized gain (loss) on investment securities, net of
tax
|
20 | (20 | ) | - | ||||||||||
|
Unrealized
gains on cash flow hedges, net of tax
|
- | - | 1 | |||||||||||
|
Total
comprehensive (loss) income
|
$ | (82 | ) | $ | 100 | $ | 414 | |||||||
| (c) |
Includes
income tax benefits resulting from the exercise of stock options of $2
million in 2009, $2 million in 2008 and $12 million in
2007.
|
|||||||||||||
| (d) |
Includes
$10 million from the fair value of Hercules stock options converted into
stock options for Ashland
shares.
|
|||||||||||||
See Notes
to Consolidated Financial Statements.
|
Ashland
Inc. and Consolidated Subsidiaries
|
||||||||||||
|
Statements
of Consolidated Cash Flows
|
||||||||||||
|
Years
Ended September 30
|
||||||||||||
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
flows provided by operating activities from continuing
operations
|
||||||||||||
|
Net
income
|
$ | 71 | $ | 167 | $ | 230 | ||||||
|
Loss
(income) from discontinued operations (net of income
taxes)
|
7 | 8 | (29 | ) | ||||||||
|
Adjustments
to reconcile income from continuing operations
|
||||||||||||
|
to
cash flows from operating activities
|
||||||||||||
|
Depreciation
and amortization
|
329 | 145 | 133 | |||||||||
|
Debt
issuance cost amortization
|
52 | - | - | |||||||||
|
Purchased
in-process research and development amortization
|
10 | - | - | |||||||||
|
Deferred
income taxes
|
12 | 44 | 22 | |||||||||
|
Equity
income from affiliates
|
(14 | ) | (23 | ) | (15 | ) | ||||||
|
Distributions
from equity affiliates
|
15 | 13 | 10 | |||||||||
|
Gain
from the sale of property and equipment
|
(2 | ) | (2 | ) | (4 | ) | ||||||
|
Stock
based compensation expense - Note N
|
9 | 12 | 16 | |||||||||
|
Stock
contributions to qualified savings plans
|
13 | - | - | |||||||||
|
Net
(gain) loss on divestitures - Note C
|
(59 | ) | (20 | ) | 3 | |||||||
|
Inventory
fair value adjustment related to Hercules acquisition
|
37 | - | - | |||||||||
|
Loss
on currency swaps related to Hercules acquisition
|
54 | - | - | |||||||||
|
Loss
on auction rate securities
|
32 | - | - | |||||||||
|
Change
in operating assets and liabilities (a)
|
461 | 134 | (177 | ) | ||||||||
| 1,027 | 478 | 189 | ||||||||||
|
Cash
flows used by investing activities from continuing
operations
|
||||||||||||
|
Additions
to property, plant and equipment
|
(174 | ) | (205 | ) | (154 | ) | ||||||
|
Proceeds
from the disposal of property, plant and equipment
|
47 | 10 | 27 | |||||||||
|
Purchase
of operations - net of cash acquired
|
(2,080 | ) | (129 | ) | (75 | ) | ||||||
|
Proceeds
from sale of operations
|
114 | 26 | - | |||||||||
|
Settlement
of currency swaps related to Hercules acquisition
|
(95 | ) | - | - | ||||||||
|
Purchases
of available-for-sale securities
|
- | (435 | ) | (484 | ) | |||||||
|
Proceeds
from sales and maturities of available-for-sale securities
|
73 | 315 | 680 | |||||||||
| (2,115 | ) | (418 | ) | (6 | ) | |||||||
|
Cash
flows provided (used) by financing activities from continuing
operations
|
||||||||||||
|
Proceeds
from the issuance of long-term debt
|
2,628 | - | - | |||||||||
|
Repayment
of long-term debt
|
(1,862 | ) | (5 | ) | (13 | ) | ||||||
|
Proceeds
from/repayments of issuance of short-term debt
|
(19 | ) | - | - | ||||||||
|
Debt
issuance/modification costs
|
(162 | ) | - | - | ||||||||
|
Cash
dividends paid
|
(22 | ) | (69 | ) | (743 | ) | ||||||
|
Proceeds
from the exercise of stock options
|
9 | 3 | 19 | |||||||||
|
Excess
tax benefits related to share-based payments
|
1 | 1 | 9 | |||||||||
|
Repurchase
of common stock
|
- | - | (288 | ) | ||||||||
| 573 | (70 | ) | (1,016 | ) | ||||||||
|
Cash
used by continuing operations
|
(515 | ) | (10 | ) | (833 | ) | ||||||
|
Cash
used by discontinued operations
|
||||||||||||
|
Operating
cash flows
|
(2 | ) | (8 | ) | (3 | ) | ||||||
|
Investing
cash flows
|
- | - | (92 | ) | ||||||||
| (2 | ) | (8 | ) | (95 | ) | |||||||
|
Effect
of currency exchange rate changes on cash and cash
equivalents
|
(17 | ) | 7 | 5 | ||||||||
|
Decrease
in cash and cash equivalents
|
(534 | ) | (11 | ) | (923 | ) | ||||||
|
Cash
and cash equivalents - beginning of year
|
886 | 897 | 1,820 | |||||||||
|
Cash
and cash equivalents - end of year
|
$ | 352 | $ | 886 | $ | 897 | ||||||
|
(Increase) decrease in
operating assets (a)
|
||||||||||||
|
Accounts
receivable
|
$ | 405 | $ | 10 | $ | (56 | ) | |||||
|
Inventories
|
147 | 126 | (75 | ) | ||||||||
|
Other
current assets
|
102 | (53 | ) | (22 | ) | |||||||
|
Investments
and other assets
|
12 | 78 | 90 | |||||||||
|
Increase (decrease) in
operating liabilities (a)
|
||||||||||||
|
Trade
and other payables
|
(208 | ) | 57 | (103 | ) | |||||||
|
Other
current liabilities
|
13 | (7 | ) | (20 | ) | |||||||
|
Pension
contributions
|
(47 | ) | (25 | ) | (58 | ) | ||||||
|
Other
noncurrent liabilities
|
37 | (52 | ) | 67 | ||||||||
|
Change
in operating assets and liabilities
|
$ | 461 | $ | 134 | $ | (177 | ) | |||||
|
Supplemental
disclosures
|
||||||||||||
|
Interest
paid
|
$ | 198 | $ | 10 | $ | 10 | ||||||
|
Income
taxes paid
|
49 | 53 | 25 | |||||||||
See Notes
to Consolidated Financial Statements.
Ashland
Inc. and Consolidated Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
A – SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation and basis of presentation
The
accompanying Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(U.S. GAAP) and U.S. Securities and Exchange Commission
regulations. In the opinion of management all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included, except as described in Note E. All material
intercompany transactions and balances have been eliminated. Research
and development expenses, which previously had been reported within selling,
general and administrative expenses of the Statements of Consolidated Income
during 2008 and 2007, have been reclassified as a separate caption within these
financial statements. Additionally, certain assets and liabilities
that have been categorized as held for sale or sold during 2009 have been
reclassified within the September 30, 2008 Consolidated Balance
Sheet. Other prior period data has been reclassified in the
Consolidated Financial Statements and accompanying notes to conform to the
current period presentation. These reclassifications did not impact
operating income, net income, earnings per share, total assets or total
liabilities, as previously reported.
The
Consolidated Financial Statements include the accounts of Ashland and its
majority owned subsidiaries. In addition, Ashland consolidates a
variable interest entity, acquired as part of the Hercules Incorporated
(Hercules) acquisition, in which Ashland has a 40% ownership interest and has
been deemed to be the primary beneficiary. As of September 30, 2009,
this variable interest entity had an equity position of $24
million. Investments in joint ventures and 20% to 50% owned
affiliates where Ashland has the ability to exert significant influence are
accounted for by the equity method.
In
November 2008, Ashland completed the acquisition of Hercules which changed
Ashland’s reporting structure. Ashland is now composed of five
reporting segments: Ashland Aqualon Functional Ingredients
(Functional Ingredients), previously Hercules’ Aqualon Group, Ashland Hercules
Water Technologies (Water Technologies), which includes Hercules’ Paper
Technologies and Ventures segment as well as Ashland’s legacy Water Technologies
segment, Ashland Performance Materials (Performance Materials), Ashland Consumer
Markets (Consumer Markets), and Ashland Distribution
(Distribution). See Notes B and P for additional information on
the Hercules acquisition and reporting segment results.
Use
of estimates, risks and uncertainties
The
preparation of Ashland’s Consolidated Financial Statements in conformity with
U.S. GAAP 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 (including goodwill and other intangible assets), employee
benefit obligations, income taxes, other liabilities 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.
Ashland
has evaluated the period from September 30, 2009, the date of the financial
statements, through November 23, 2009, the date of the issuance and filing of
the financial statements, and determined that no material subsequent event has
occurred that would affect the information presented within these financial
statements, nor require additional disclosure, except for the $100 million
Ashland Common Stock contribution made to the U.S. pension plan in November
2009. For further information on this contribution, see Note
O.
Ashland’s
results are affected by domestic and international economic, political,
legislative, regulatory and legal actions. Economic conditions, such
as recessionary trends, inflation, interest and monetary exchange rates,
government fiscal policies, and changes in the prices of hydrocarbon-based
products and other raw materials, can have a significant effect on
operations. While Ashland maintains reserves for anticipated
liabilities and carries various levels of insurance, Ashland could be affected
by civil, criminal, regulatory or administrative actions, claims or proceedings
relating to asbestos, environmental remediation or other matters.
Cash
and cash equivalents
Cash and
cash equivalents include cash on hand and highly liquid investments maturing
within three months after purchase.
NOTE
A – SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment
securities
Securities
are classified as available-for-sale or held-to-maturity on the date of
purchase. 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, a component of stockholders’
equity. Held-to-maturity securities are recorded at amortized
cost. Interest and dividends are reported within the caption net
interest and other financing (expense) income in the Statements of Consolidated
Income. The cost of securities sold is based on the specific
identification method. All securities are reviewed quarterly for
possible other-than-temporary impairment. The review includes an
analysis of the facts and circumstances of each individual investment such as
the severity of loss, the length of time the fair value has been below cost, the
expectation for that security’s performance, the creditworthiness of the issuer
and Ashland’s intent and ability to hold the security. A decline in
value that is considered to be other-than-temporary is recorded as a loss within
the Statements of Consolidated Income. The net unrealized gain on
investment securities in accumulated other comprehensive income as of September
30, 2009 was not significant. The net unrealized loss on investment
securities included in accumulated other comprehensive income as of September
30, 2008 was $20 million. For additional information on investment
securities, see Note G.
Allowance
for doubtful accounts
Ashland
records an allowance for doubtful accounts as a best estimate of the amount of
probable credit losses for accounts receivable. Each month Ashland
reviews this allowance and considers factors such as customer credit, past
transaction history with the customer and changes in customer payment terms when
determining whether the collection of a receivable is reasonably
assured. Past due balances over 90 days and over a specified
amount are reviewed individually for collectibility. The allowance
for doubtful accounts is adjusted when it becomes probable a receivable will not
be recovered.
Inventories
Inventories
are carried at the lower of cost or market. Certain chemicals,
plastics and lubricants with a replacement cost of $260 million at
September 30, 2009, and $384 million at September 30, 2008, are valued
at cost using the last-in, first-out (LIFO) method. During the year
ended September 30, 2009 and 2008 certain inventory quantities valued under the
LIFO method were significantly reduced. This reduction resulted in a
liquidation of LIFO quantities carried at lower costs prevailing in prior years
as compared with the cost of purchases within the periods presented, the effect
of which decreased cost of goods sold for 2009 and 2008 by $18 million and $31
million, respectively. LIFO liquidations did not have a material
impact to cost of sales and operating expenses in 2007. The remaining
inventories are valued using the weighted-average cost method.
|
(In
millions)
|
2009
|
2008
|
(a) | |||||
|
Finished
products
|
$ | 567 | $ | 644 | ||||
|
Raw
materials, supplies and work in process
|
112 | 32 | ||||||
|
LIFO
carrying values
|
(125 | ) | (200 | ) | ||||
| $ | 554 | $ | 476 | |||||
(a) Excludes
$19 million of inventory related to the Drew Marine divestiture in 2009
classified as held for sale.
Property,
plant and equipment
The cost
of property, plant and equipment is depreciated by the straight-line method over
the estimated useful lives of the assets. Buildings are depreciated
principally over 25 to 35 years and machinery and equipment principally over 4
to 15 years. Such costs are periodically reviewed for recoverability
when impairment indicators are present. Such indicators include,
among other factors, operating losses, unused capacity, market value declines
and technological obsolescence. Recorded values of property, plant
and equipment that are not expected to be recovered through undiscounted future
net cash flows are written down to current fair value, which generally is
determined from estimated discounted future net cash flows (assets held for use)
or net realizable value (assets held for sale). Asset impairment
charges are included within the selling, general and administrative expense
caption of the Statements of Consolidated Income and were $3 million in 2009,
$2 million in 2008 and $15 million in 2007. Asset impairment
charges for 2009 exclusively relate to corporate aircraft that were moved to
assets held for sale upon the shutdown of the corporate aviation department
during the year. Asset impairment charges for 2007 include an $11
million charge related to PathGuard®
pathogen control equipment. As a result of Water Technologies’
decision to withdraw from this market during 2007, these assets were written
down to the approximate fair value of comparable assets. Total
depreciation expense on property, plant and equipment for 2009, 2008 and 2007
was $261 million, $134 million and $122 million,
respectively. Included in depreciation expense for 2009
was
$17 million
in accelerated depreciation related to the closure of plant facilities included
within the cost of sales and operating expenses caption of the Statements of
Consolidated Income. Capitalized interest for 2009 was $3 million and
was not significant for 2008 and 2007.
Assets
held for sale
When
specific actions to dispose of assets progress to the point that “plan of sale”
criteria, as defined within U.S. GAAP, have been met, the underlying assets and
liabilities are adjusted to fair value, which may include an impairment charge
to the extent identified, and reclassified into a “held for sale” category
within the Consolidated Balance Sheet. Impairment charges, to the
extent they exist, are recognized in the Statements of Consolidated
Income. For additional information on assets held for sale, see
Note C.
Goodwill
and other indefinite-lived intangibles
In
accordance with U.S. GAAP for goodwill and other indefinite-lived intangibles,
Ashland tests these assets for impairment annually as of July 1 and whenever
events or circumstances made it more likely than not that an impairment may have
occurred. Ashland reviews goodwill for impairment based on its
identified reporting units, which are defined as reportable segments or
groupings of businesses one level below the reportable segment
level. Ashland tests goodwill for impairment by comparing the
carrying value to the estimated fair value of its reporting units, determined
using externally quoted prices (if available) or a discounted cash flow model
and, when deemed necessary, a market approach. Ashland tests its
indefinite-lived intangible assets, principally trademarks and trade names,
using a “relief-from-royalty” valuation method compared to the carrying
value. Significant assumptions inherent in the valuation
methodologies for goodwill and other intangibles are employed and include, but
are not limited to, such estimates as projected business results, growth rates,
Ashland’s weighted-average cost of capital, royalty and discount
rates. For further information on goodwill and other intangible
assets, see Note H.
Derivative
instruments
Ashland
regularly uses foreign currency derivative instruments to manage its exposure to
certain transactions denominated in foreign currencies. All
derivative instruments are recognized as either assets or liabilities on the
balance sheet and are measured at fair value. Changes in the fair
value of all derivatives are recognized immediately in income unless the
derivative qualifies as a hedge of future cash flows. Gains and
losses related to a hedge are either recognized in income immediately to offset
the gain or loss on the hedged item, or deferred and recorded in the
stockholders’ equity section of the Consolidated Balance Sheets as a component
of accumulated other comprehensive income and subsequently recognized in the
Statements of Consolidated Income when the hedged item affects net
income. The ineffective portion of the change in fair value of a
hedge is recognized in income immediately. At September 30, 2009 and
2008, Ashland did not have any derivative contracts that qualified for hedge
accounting. Credit risks arise from the possible inability of
counterparties to meet the terms of their contracts, but exposure is limited to
the replacement value of the contracts. Ashland further minimizes
this credit risk through internal monitoring procedures and as of
September 30, 2009 does not have significant credit risk on open derivative
contracts. For additional information on derivative instruments, see
Note G.
Revenue
recognition
Revenues
generally are recognized when persuasive evidence of an arrangement exists,
products are received or services are provided to customers, the sales price is
fixed or determinable and collectability is reasonably assured. For
consignment inventory, title and risk of loss are transferred when the products
have been consumed or used in the customer’s production process. The
percentage of Ashland’s revenue recognized from consignment inventory sales was
5% during 2009 and 3% during 2008 and 2007. Ashland reports all
revenues net of tax assessed by qualifying governmental
authorities.
Expense
recognition
Cost of
sales and operating expenses include material and production costs, as well as
the costs of inbound and outbound freight, purchasing and receiving, inspection,
warehousing, internal transfers, and all other distribution network
costs. Selling, general and administrative expenses include sales and
marketing costs, advertising, customer support, environmental remediation,
corporate and divisional administrative and other costs. Advertising
costs ($63 million in 2009, $66 million in 2008 and $67 million in
2007) and research and development costs ($96 million in 2009, $48 million in
2008 and $45 million in 2007) are expensed as incurred.
During
2009, Consumer Markets announced an engine guarantee associated with its
Valvoline®
product line. Consumers are beginning to register their vehicles to
qualify for the guarantee. Ashland has established an estimation
methodology for quantifying the future potential liability related to this
guarantee program. At September 30, 2009, the reserve associated with
this guarantee was not significant. Generally, all other Ashland
products are sold without extended warranties.
NOTE
A – SIGNIFICANT ACCOUNTING POLICIES (continued)
Income
taxes
Ashland
is subject to income taxes in the United States and numerous foreign
jurisdictions. Significant judgment in the forecasting of taxable
income using historical and projected future operating results is required in
determining Ashland’s provision for income taxes and the related assets and
liabilities. The provision for income taxes includes income taxes
paid, currently payable or receivable, and those deferred. Under U.S.
GAAP, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities, and are
measured using enacted tax rates and laws that are expected to be in effect when
the differences reverse. Deferred tax assets are also recognized for
the estimated future effects of tax loss carryforwards. The effect on
deferred taxes of changes in tax rates is recognized in the period in which the
enactment date changes. Valuation allowances are established when
necessary on a jurisdictional basis to reduce deferred tax assets to the amounts
expected to be realized. In the event that the actual outcome of
future tax consequences differs from Ashland’s estimates and assumptions due to
changes or future events such as tax legislation, geographic mix of earnings,
completion of tax audits or earnings repatriation plans, the resulting change to
the provision for income taxes could have a material affect on the Consolidated
Statement of Income and Consolidated Balance Sheet. For additional
information on income taxes, see Note L.
Asbestos-related
litigation
Ashland
is subject to liabilities from claims alleging personal injury caused by
exposure to asbestos. Such claims result from indemnification
obligations undertaken in 1990 in connection with the sale of Riley Stoker
Corporation (Riley) and the acquisition of Hercules in November
2008. Although Riley, a former subsidiary, was neither a producer nor
a manufacturer of asbestos, its industrial boilers contained some
asbestos-containing components provided by other companies. Hercules,
a wholly owned subsidiary of Ashland, has liabilities from claims alleging
personal injury caused by exposure to asbestos. Such claims typically
arise from alleged exposure to asbestos fibers from resin encapsulated pipe and
tank products sold by one of Hercules’ former subsidiaries to a limited
industrial market.
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. 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 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. For additional information on
asbestos-related litigation, see Note P.
Environmental
remediation
Accruals
for environmental remediation are recognized when it is probable a liability has
been incurred and the amount of that liability can be reasonably
estimated. Such costs are charged to expense if they relate to the
remediation of conditions caused by past operations or are not expected to
mitigate or prevent contamination from future operations. Liabilities
are recorded at estimated cost values based on experience, assessments and
current technology, without regard to any third-party recoveries and are
regularly adjusted as environmental assessments and remediation efforts
continue. For additional information on environmental remediation,
see Note P.
Pension
and other postretirement benefit costs
The
funded status of Ashland’s pension and other postretirement benefit plans is
recognized in the Consolidated Balance Sheets. The funded status is
measured as the difference between the fair value of plan assets and the benefit
obligation at September 30, the measurement date. For defined benefit
pension plans, the benefit obligation is the projected benefit obligation (PBO)
and for the other postretirement benefit plans the benefit obligation is the
accumulated postretirement benefit obligation (APBO). The PBO
represents the actuarial present value of benefits expected to be paid upon
retirement based on estimated future compensation levels. The APBO
represents the actuarial present value of postretirement benefits attributed to
employee services already rendered. The fair value of plan assets
represents the current market value of assets held by an irrevocable trust fund
for the sole benefit of participants. The measurement of the benefit
obligation is based on Ashland’s estimates and actuarial
valuations. These valuations reflect the terms of the plans and use
participant-specific information such as compensation, age and years of service,
as well as certain key assumptions that require significant judgment, including,
but not limited to, estimates of discount rates, expected return on plan assets,
rate of compensation increases, interest crediting rates and mortality
rates. For additional information regarding plan assumptions and the
current financial position of the pension and other postretirement plans, see
Note O.
Foreign
currency translation
Operations
outside the United States are measured primarily using the local currency as the
functional currency. Upon consolidation, the results of operations of
the subsidiaries and affiliates whose functional currency is other than the U.S.
dollar are translated into U.S. dollars at the average exchange rates for
the year while assets and liabilities are translated at year-end exchange
rates. Adjustments to translate assets and liabilities into U.S.
dollars are recorded in the stockholders’ equity section of the Consolidated
Balance Sheets as a component of accumulated other comprehensive income and are
included in net earnings only upon sale or liquidation of the underlying foreign
subsidiary or affiliated company.
Stock
incentive plans
Ashland
recognizes compensation expense for stock incentive plans awarded to key
employees and directors, primarily in the form of stock appreciation rights
(SARs), restricted stock, performance shares and non-vested stock awards, based
upon the grant-date fair value over the appropriate vesting
period. Ashland utilizes several industry accepted valuation models
to determine the fair value. For further information concerning stock
incentive plans, see Note N.
Earnings
per share
The
following is the computation of basic and diluted earnings per share (EPS) from
continuing operations. Stock options and SARs available to purchase
shares outstanding for each reported year whose grant price was greater than the
average market price of Ashland Common Stock for each applicable fiscal year
were not included in the computation of income from continuing operations per
diluted share because the effect of these instruments would be
antidilutive. The total number of these shares outstanding was 1.4
million, 2.2 million and, 0.5 million for 2009, 2008 and 2007,
respectively.
|
(In
millions except per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
Numerator
|
||||||||||||
|
Numerator
for basic and diluted EPS -
|
||||||||||||
|
Income
from continuing operations
|
$ | 78 | $ | 175 | $ | 201 | ||||||
|
Denominator
|
||||||||||||
|
Denominator
for basic EPS - Weighted-average
|
||||||||||||
|
common
shares outstanding
|
72 | 63 | 63 | |||||||||
|
Share
based awards convertible to common shares
|
1 | 1 | 1 | |||||||||
|
Denominator
for diluted EPS - Adjusted weighted-
|
||||||||||||
|
average
shares and assumed conversions
|
73 | 64 | 64 | |||||||||
|
EPS
from continuing operations
|
||||||||||||
|
Basic
|
$ | 1.08 | $ | 2.78 | $ | 3.20 | ||||||
|
Diluted
|
1.07 | 2.76 | 3.15 | |||||||||
New
accounting pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued
accounting guidance related to fair value measurements (The Accounting Standards
Codification (ASC) 820-10-15 Fair Value Measurements and Disclosures), which
defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and requires expanded
disclosures about fair value measurements. This guidance applies to
all other accounting pronouncements that require or permit fair value
measurements because the FASB has previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. The guidance became effective for financial assets and
liabilities of Ashland on October 1, 2008. The provisions of
this guidance that related to nonfinancial assets and liabilities will become
effective for Ashland on October 1, 2009 and will be applied
prospectively. Fair value disclosures for financial assets and
liabilities in connection with the initial adoption are provided in
Note G.
In
December 2007, the FASB issued new guidance for entities that enter into
collaborative arrangements (ASC 808-10 Collaborative
Arrangements). The guidance 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. This guidance defines a collaborative
arrangement as a contractual arrangement that involves two or more parties that
both: (1) actively participate in a joint operating activity and (2)
are exposed to significant risks and rewards that depend on the commercial
success of the joint operating activity. This guidance will become
effective for Ashland on October 1, 2009. The adoption of this
guidance is not expected to have a material impact on the Consolidated Financial
Statements.
In
December 2007, the FASB issued guidance related to business combinations (ASC
805-10 Business Combinations) which provides that the acquisition method of
accounting (formerly referred to as purchase method) be used for all
business
NOTE
A – SIGNIFICANT ACCOUNTING POLICIES (continued)
combinations
and that an acquirer be identified for each business combination. In
addition, the guidance establishes revised principles and requirements for how
Ashland will recognize and measure assets, liabilities and expenses related to a
business combination. This guidance will impact the accounting and
reporting of business combinations that occur after October 1, 2009 and the
manner in which changes in estimates related to acquisitions that occurred prior
to the effective date, such as the Hercules acquisition.
In
December 2007, the FASB issued guidance related to noncontrolling ownership
interests in the Consolidated Financial Statements (ASC 810-10-65-1
Consolidation). This guidance establishes new accounting and
reporting standards that require the ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled and presented in
the consolidated balance sheet within equity, but separate from the parent’s
equity. The guidance also requires the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of
income. In addition, when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary shall be
initially measured at fair value, with the gain or loss on the deconsolidation
of the subsidiary measured using the fair value of any noncontrolling equity
investment rather than the carrying amount of that retained
investment. The guidance also clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial
interest and includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. This
guidance will become effective for Ashland on October 1, 2009 and is not
expected to have a material impact on the Consolidated Financial
Statements.
In April
2008, the FASB issued guidance related to the determination of the useful life
of intangible assets (ASC 350-30 General Intangibles Other than Goodwill) 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. 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. This guidance will become effective for Ashland on
October 1, 2009 and is not expected to have an impact on the Consolidated
Financial Statements.
In
December 2008, the FASB issued guidance related to employers’ disclosures about
postretirement benefit plan assets (ASC 715 Compensation-Retirement Benefits)
which requires additional disclosures such as significant risks within plan
assets, investment allocation decisions, fair values by major category of plan
assets and valuation techniques. This guidance will become effective
for Ashland on September 30, 2010. Ashland does not anticipate
the adoption of this guidance will have a material impact on the Consolidated
Financial Statement disclosures.
In May
2009, the FASB issued guidance related to subsequent events (ASC 855 Subsequent
Events) which requires entities to record and disclose events or transactions
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. This guidance was effective for
Ashland on June 30, 2009 and did not have an impact on the Consolidated
Financial Statements.
In June
2009, the FASB issued accounting guidance related to variable interest entities
(ASC 805 Consolidation) which alters how an entity determines whether it has a
controlling financial interest in a variable interest entity. This
guidance also requires ongoing reassessments of the analysis and provides for
enhanced disclosures about an entity’s involvement in a variable interest
entity. This Statement will become effective for Ashland on October
1, 2010. Ashland does not anticipate the adoption of this guidance
will have a material impact on the Consolidated Financial
Statements.
NOTE
B – ACQUISITIONS
On
November 13, 2008, Ashland completed its acquisition of Hercules. The
acquisition creates a defined core for Ashland composed of three specialty
chemical businesses which includes specialty additives and ingredients, paper
and water technologies, and specialty resins. The acquisition also
creates a leadership position in attractive and growing renewable/sustainable
chemistries.
The
merger was recorded by Ashland using the purchase method of accounting in
accordance with applicable U.S. GAAP whereby the total purchase price, including
qualifying transaction-related expenses, were allocated to tangible and
intangible assets and liabilities acquired based upon their respective fair
values.
The total
merger consideration for outstanding Hercules Common Stock was $2,096 million in
cash and $450 million in Ashland Common Stock. Each share of Hercules
Common Stock issued and outstanding immediately prior to the effective date of
the Hercules acquisition was converted into the right to receive $18.60 in cash
and 0.0930 of a share of Ashland Common Stock, subject to the payment of cash in
lieu of fractional shares of Ashland Common Stock. Ashland exchanged
10.5 million shares of Ashland common shares for the 112.7 million shares of
outstanding Hercules Common Stock on November 13, 2008.
The
Hercules acquisition was financed in part through $2,600 million in secured
financing from Bank of America Securities LLC, Scotia Capital (USA) Inc. and
other lenders consisting of a $400 million revolving credit facility, a
$400 million term loan A facility, an $850 million term loan B facility, a
$200 million accounts receivable securitization facility and a $750 million
bridge loan, which was subsequently replaced in May 2009 by $650 million senior
unsecured notes, see Note I for further information. The total debt
drawn upon the closing of the completed merger was approximately $2,300 million
with the remaining cash consideration for the transaction paid from Ashland’s
existing cash, which was used in part to extinguish $594 million of existing
Hercules debt and to pay transaction fees associated with the financing
facilities.
The
purchase price of Hercules, excluding debt assumed, was $2,594 million,
including expenses incurred in connection with the transaction, and consisted of
the following items:
|
Purchase
price (in millions)
|
|||||
|
Cash
consideration for stock
|
$
|
2,096
|
(a)
|
||
|
Stock
consideration
|
450
|
(b)
|
|||
|
Cash
consideration for Restricted Stock Units (RSUs)
|
5
|
(c)
|
|||
|
Options
|
|||||
|
Cash-out
options
|
15
|
(d)
|
|||
|
Fair
value of Hercules stock options converted into stock options
for Ashland shares
|
10
|
(e)
|
|||
|
Transaction
costs
|
18
|
(f)
|
|||
|
Total
purchase price
|
$
|
2,594
|
|||
|
(a)
|
The
cash portion ($18.60) of the merger consideration paid per outstanding
share of Hercules Common
Stock.
|
|
(b)
|
The
stock portion of the merger consideration was based on 0.0930 of a share
of Ashland Common Stock for each share of Hercules Common
Stock. A price of $42.93 per Ashland common share was assumed,
which represents the average closing price per share of Ashland Common
Stock on the New York Stock Exchange (NYSE) on the announcement date two
days immediately prior to and immediately subsequent to the announcement
date of the proposed acquisition in accordance with U.S.
GAAP.
|
|
(c)
|
The
cash payment for RSUs was calculated by multiplying the number of shares
of Hercules Common Stock underlying the RSUs by the cash-out amount, which
is the sum of $18.60 and the product of 0.0930 and the average closing
price of Ashland Common Stock on the NYSE for the ten trading days
preceding the completion of the merger. Hercules RSUs
represented the equivalent of approximately 240 thousand
shares.
|
|
(d)
|
The
cash payment for certain stock options was equal to the product of the
number of Hercules shares subject to the option and the amount by which
the exercise price of the Hercules option is exceeded by the sum of $18.60
and the amount calculated by multiplying 0.0930 by the average closing
price of Ashland Common Stock on the NYSE for the ten trading days
preceding the completion of the
merger.
|
|
(e)
|
Approximately one million of
Hercules’ stock options were converted into options to purchase shares of
Ashland Common Stock based on the option exchange ratio set forth in the
merger agreement. The fair value of Hercules’ stock options
that were converted into options to purchase shares of Ashland Common
Stock were recognized as a component of the purchase price, based on the
fair value of the options, as described below. The additional
purchase price was calculated using the Black-Scholes option pricing
model, which considered a price of $42.93 per Ashland common share assumed
and the following weighted-average
assumptions.
|
|
Black-Scholes
|
||||
|
Expected
option life (in years)
|
1.3 | |||
|
Volatility
|
26.0 | % | ||
|
Risk-free
rate
|
0.7 | % | ||
|
Dividend
yield
|
1.2 | % | ||
The
expected life of the options was determined by taking into account the
contractual life of the options (of which a significant amount were less than
one year), the accelerated vesting of all Hercules options at the date of the
acquisition, and estimated attrition of the option holders. The
volatility, dividend yield, and risk-free interest rate assumptions used were
derived using the closing date of the acquisition and were impacted by the
short-term expected option life. Ashland believes the fair value of
the converted stock options approximates the fair value of the Hercules stock
options. Accordingly, the fair value of the converted stock options
was recognized as a component of the purchase price and no additional amounts
have been reflected as compensation expense.
|
(f)
|
Ashland’s
costs for various legal and financial services associated with the
transaction.
|
F-15
NOTE
B – ACQUISITIONS (continued)
The
following table summarizes the values of the assets acquired and liabilities
assumed at the date of acquisition, as well as adjustments that have been made
as a result of ongoing valuations.
|
Purchase
price allocation (in millions)
|
At
November
13
2008
|
|||
|
Assets:
|
||||
|
Cash
|
$ | 54 | ||
|
Accounts
receivable
|
355 | |||
|
Inventory
|
261 | |||
|
Other
current assets
|
57 | |||
|
Intangible
assets
|
1,116 | |||
|
Goodwill
|
1,806 | |||
|
Asbestos
receivable
|
118 | |||
|
Property,
plant and equipment
|
1,059 | |||
|
Purchased
in-process research and development
|
10 | |||
|
Other
noncurrent assets
|
164 | |||
|
Liabilities:
|
||||
|
Accounts
payable
|
(231 | ) | ||
|
Accrued
expenses
|
(215 | ) | ||
|
Debt
|
(799 | ) | ||
|
Pension
and other postretirement obligations
|
(316 | ) | ||
|
Environmental
|
(100 | ) | ||
|
Asbestos
|
(494 | ) | ||
|
Deferred
tax - net
|
(129 | ) | ||
|
Other
noncurrent liabilities
|
(122 | ) | ||
|
Total
purchase price
|
$ | 2,594 | ||
As of
September 30, 2009, the purchase price allocation for the acquisition was
essentially completed. Adjustments to the current fair value
estimates may occur as valuations are finalized for Hercules asbestos
receivables and reserves. For additional information, see Note
P.
Purchased
in-process research and development (IPR&D) represents the value assigned in
a business combination to acquired research and development projects that, as of
the date of the acquisition, had not established technological feasibility and
had no alternative future use. Amounts assigned to IPR&D meeting
these criteria must be charged to expense as part of the allocation of the
purchase price of the business combination. Ashland recorded pretax
charges totaling $10 million associated with the Hercules acquisition
within the research and development expenses caption of the Statement of
Consolidated Income. The estimated values assigned to the IPR&D
projects were determined based on a discounted cash flow model assigned to the
following projects:
|
(In
millions)
|
|||||
|
Functional
Ingredients
|
Corebond
|
$ | 2 | ||
|
Water
Technologies
|
Biofilm
Sensor
|
$ | 2 | ||
|
Water
Technologies
|
Surface
Dry Strength
|
$ | 2 | ||
|
Functional
Ingredients / Water Technologies
|
Other
|
$ | 4 | ||
Ashland has identified approximately $255 million of certain product trade names, within the Functional Ingredients and Water Technologies businesses, that have been designated as indefinite-lived assets. Ashland’s designation of an indefinite life for these assets took many factors into consideration, including the current market leadership position of the brands as well as their recognition worldwide in the industry. The remaining $861 million identified finite-lived intangible assets are being amortized over the estimated useful life in proportion to the economic benefits consumed. Ashland considered the useful lives of the customer relationships, developed technology and product trade names to be 10 to 24 years, 5 to 20 years and 20 years, respectively. The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future cash flows of the combined company. In addition, Ashland reviewed certain technological trends and also considered the relative stability in the current Hercules customer base.
F-16
The
following details the total intangible assets identified.
|
Intangible
asset type (in millions)
|
Value
|
Life
(years)
|
||||||
|
Customer
relationships - Functional Ingredients
|
$ | 289 | 10 - 24 | |||||
|
Customer
relationships - Water Technologies
|
240 | 12 | ||||||
|
Developed
technology - Functional Ingredients
|
217 | 15 | ||||||
|
Developed
technology - Water Technologies
|
60 | 5 - 20 | ||||||
|
Product
trade names - Functional Ingredients
|
32 | 20 | ||||||
|
Product
trade names - Functional Ingredients
|
104 |
Indefinite
|
||||||
|
Product
trade names - Water Technologies
|
151 |
Indefinite
|
||||||
|
Other
|
23 | 36 - 47 | ||||||
|
Total
|
$ | 1,116 | ||||||
The
results of Hercules’ operations have been included in Ashland’s Consolidated
Financial Statements since the November 13, 2008 closing date. The
following unaudited pro forma information assumes the acquisition of Hercules
occurred at the beginning of the respective periods presented and excludes
certain nonrecurring charges, such as purchase accounting adjustments and other
nonrecurring charges associated with the Hercules acquisition, that were deemed
necessary to exclude for comparability purposes.
|
Unaudited
pro forma information
|
Fiscal
year ended
September
30
|
|||||||
|
(In
millions, except per share amounts)
|
2009
|
2008
|
||||||
|
Revenues
|
$ | 8,373 | $ | 10,699 | ||||
|
Income
from continuing operations
|
$ | 239 | $ | 183 | ||||
|
Net
income
|
$ | 232 | $ | 208 | ||||
|
Basic
earnings per share
|
||||||||
|
Income
from continuing operations
|
$ | 3.22 | $ | 2.49 | ||||
|
Net
income
|
$ | 3.12 | $ | 2.83 | ||||
|
Diluted
earnings per share
|
||||||||
|
Income
from continuing operations
|
$ | 3.16 | $ | 2.45 | ||||
|
Net
income
|
$ | 3.07 | $ | 2.78 | ||||
The
unaudited pro forma information is presented above for illustrative purposes
only and does not purport to be indicative of the results of future operations
of Ashland or the results that would have been attained had the operations been
combined during the periods presented.
In June
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 were merged into Performance Materials, had sales of
$126 million in calendar year 2007, principally in North America.
In
December 2006, Ashland 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 includes production facilities in
Milwaukee, Wisconsin and Greensboro, North Carolina that was merged into
Performance Materials, was valued at $74 million. At the time this
purchase transaction was announced, Northwest Coatings had trailing twelve month
sales of approximately $40 million.
NOTE
C – DIVESTITURES
In June
2009, Ashland signed a definitive agreement to sell its global marine services
business known as Drew Marine, a business unit of Water Technologies, to J.F.
Lehman & Co. in a transaction valued at approximately $120 million before
tax, which was subsequently reduced by $4 million after giving affect to
post-closing adjustments related to working capital. The Drew Marine
business, with annual revenues of approximately $140 million a year, has
approximately 325 employees, 28 offices and 98 stocking locations in 47
countries. The business is a recognized global leader in providing
technical solutions, high value products and services to the global marine
industry, including chemicals and testing equipment, water treatment, tank
cleaners and corrosion inhibitors, sealing and welding products, refrigerants
and refrigeration services, engineered systems and products, fuel management
programs, and fire safety and rescue products and services. The
transaction closed in August 2009 and resulted in a pretax gain of $56 million,
which is included in the net gain (loss) on divestiture caption on
F-17
NOTE
C – DIVESTITURES (continued)
the
Statements of Consolidated Income. As part of this sale arrangement
Ashland has agreed to continue to manufacture certain products on behalf of Drew
Marine.
Because
this business was divested during 2009, the assets and liabilities of this
business were reflected as held for sale in the September 30, 2008 Consolidated
Balance Sheets and are comprised of the following components:
|
(In
millions - unaudited)
|
September
30
2008
|
|||
|
Accounts
receivable
|
$ | 28 | ||
|
Inventories
|
19 | |||
|
Current
assets
|
$ | 47 | ||
|
Property,
plant and equipment, net
|
$ | 2 | ||
|
Goodwill
and intangible assets
|
16 | |||
|
Deferred
income tax
|
1 | |||
|
Other
noncurrent assets
|
5 | |||
|
Noncurrent
assets
|
$ | 24 | ||
|
Trade
payables
|
$ | 12 | ||
|
Accrued
expenses and other liabilities
|
1 | |||
|
Current
liabilities
|
$ | 13 | ||
In
addition to the Drew Marine assets, Ashland had noncurrent assets held for sale
of $17 million and $22 million at September 30, 2009 and 2008, respectively,
related to corporate aircraft and certain Valvoline Instant Oil Change
locations.
In
December 2008, Ashland completed the sale of its indirectly held 33.5 percent
ownership interest in FiberVisions Holdings, LLC (FiberVisions) to Snow Phipps
Group, LLC (Snow Phipps), a New York-based private equity firm and the majority
owner of FiberVisions for $7 million. FiberVisions, a leading global
producer of specialty fibers for nonwoven fabrics and textile fibers used in
consumer and industrial products, was acquired by Ashland as part of the
Hercules acquisition. The sale of the company’s interest in
FiberVisions generated a capital loss of approximately $220 million for tax
purposes that could be used to offset capital gains. Certain
elections with respect to this capital loss need to be filed and approved by the
Internal Revenue Service before this capital loss can be used to offset past or
future capital gains. However, Ashland anticipates that it will
receive this approval. This capital loss benefit was fully offset by
a deferred tax asset valuation allowance because Ashland is not permitted to
anticipate additional future capital gains, therefore, no tax benefit was
recognized on this transaction.
In June
2008, Ashland and Süd-Chemie AG signed a nonbinding memorandum of understanding
to form a new, global 50-50 joint venture to serve foundries and the metal
casting industry. The joint venture would combine three
businesses: Ashland’s Casting Solutions business group, the
foundry-related businesses of Süd-Chemie, and Ashland-Südchemie-Kernfest GmbH
(ASK), the existing European-based joint venture between Ashland and
Süd-Chemie. Ashland’s Casting Solutions and ASK businesses recorded
revenues of approximately $375 million for fiscal year 2009. The
foundry-related businesses of Süd-Chemie AG to be contributed to the joint
venture generated revenues of approximately $220 million for the year ended
December 31, 2008. As a result of global economic developments the
scope and other aspects of this project are being re-evaluated by Ashland and
Süd-Chemie AG.
On August
28, 2006, Ashland completed the sale of the stock of Ashland Paving And
Construction, Inc. (APAC) to Oldcastle Materials, Inc. (Oldcastle) for
$1.3 billion. The sale qualified as a discontinued operation and
proceeds of the divestiture, net of transaction expenses, resulted in a total
pretax gain of $156 million. Due to the ongoing assessment of certain
tax matters associated with this divestiture, subsequent adjustments to this
gain may continue in future periods. For further information on
subsequent adjustments, see Note E.
On June
30, 2005, Ashland completed the transfer of Ashland’s 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 two other businesses were Ashland’s maleic
anhydride business and 60 Valvoline Instant Oil Change (VIOC) centers in
Michigan and northwest Ohio. Because none of the businesses qualified
as discontinued operations under U.S. GAAP, the gain was reported in income from
continuing operations on a separate line caption on the Statements of
Consolidated Income below operating income and labeled net gain (loss) on
divestitures.
Due to
the structure of the MAP Transaction, Marathon is entitled to the tax deductions
for Ashland’s future payments of certain contingent liabilities related to
previously owned businesses of Ashland. However, pursuant to the
terms of the
F-18
Tax
Matters Agreement (TMA), Marathon has agreed to compensate Ashland for these tax
deductions. Ashland recorded a discounted receivable for the
estimated present value of probable recoveries from Marathon for the portion of
these future tax deductions which is not dependent upon Marathon’s ability to
utilize these deductions. This receivable was included in the total
pretax gain on the transaction while the accretion of the discount associated
with this receivable is recorded in the net interest and other financing
(expense) income caption. At September 30, 2009 and 2008, this
receivable was $40 million and $38 million, respectively, and is included
in other current and noncurrent assets on Ashland’s Consolidated Balance
Sheets. Due to the continuing nature of certain tax issues, the
original recorded gain has been adjusted in the net gain (loss) on divestitures
caption in the Statements of Consolidated Income during 2009, 2008 and 2007, and
may continue to be adjusted in future periods.
During
2008, Ashland and Marathon agreed to a tax related settlement with respect to
four specific tax attributes and deductions subject to the terms of the
TMA. 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
of this specific agreement, Ashland recorded a gain within the net gain (loss)
on divestitures caption of the Consolidated Statement of Income of
$23 million during 2008.
NOTE
D – RESTRUCTURING ACTIVITIES
During
2008, Ashland implemented operational redesigns (2008 Program), primarily within
Ashland’s Water Technologies and Performance Materials businesses, to take
proactive steps to enhance profitability through streamlined operations and an
improved overall cost structure of the businesses. This program
continued during 2009 and was further expanded to capture additional cost saving
opportunities.
In
conjunction with the Hercules acquisition in November 2008, Ashland announced an
integration plan (Integration Plan) that targeted certain projected cost savings
as part of combining joint and redundant services and
facilities. This program focused primarily on capturing operational,
selling and administrative savings within the combined
company. Additionally, with the prolonged and significant
deterioration of global economic demand during 2009, Ashland announced in
January 2009 an additional cost reduction and organizational restructuring plan
(2009 Program), which was subsequently expanded in July 2009, to further reduce
Ashland’s overall cost structure.
In total,
Ashland has achieved run-rate cost reductions of $355 million of the combined
$400 million in these cost reduction initiatives. The cumulative
effect of these restructuring activities has resulted in the elimination of
approximately 1,600 employee positions and eight permanent facility closings
through the end of 2009 and in total is currently expected to reduce the global
workforce by a total of approximately 1,900, or 12% by the end of
2010. As of September 30, 2009, the total restructuring cost incurred
under the cost-structure efficiency programs during 2009 was $96 million, of
which $75 million during 2009 had been charged as an expense within the
Statement of Consolidated Income, consisting of $58 million classified
within the selling, general and administrative expense caption and
$17 million of accelerated depreciation charged to the cost of sales and
operating expenses caption. The remaining cost of $21 million related
to severance associated with Hercules personnel, which qualified for purchase
method of accounting in accordance with U.S. GAAP, and had no effect on the
Statement of Consolidated Income. Additional costs from reductions in
resources or facilities may occur in future periods; which could include charges
related to additional severance, plant closings, reassessed pension plan
valuations or other items, although Ashland does not currently expect these to
be significant. Ashland anticipates completing these restructuring
activities during 2010.
The
following table details at September 30, 2009 and 2008, the amount of
restructuring reserves related to the cost-structure efficiency and Hercules
integration programs included in accrued expenses and other liabilities in the
Consolidated Balance Sheet and the related activity in these reserves during
2009 and 2008.
|
(In
millions)
|
Severance
|
Plant
closure/
other
costs
|
Total
|
|||||||||
|
Balance
as of September 30, 2007
|
$ | - | $ | - | $ | - | ||||||
|
Restructuring
reserve
|
9 | - | 9 | |||||||||
|
Utilization
(cash paid or otherwise settled)
|
(2 | ) | - | (2 | ) | |||||||
|
Balance
as of September 30, 2008
|
7 | - | 7 | |||||||||
|
Restructuring
reserve
|
75 | 21 | 96 | |||||||||
|
Utilization
(cash paid or otherwise settled)
|
(44 | ) | (21 | ) | (65 | ) | ||||||
|
Balance
at September 30, 2009
|
$ | 38 | $ | - | $ | 38 | ||||||
F-19
NOTE
E – DISCONTINUED OPERATIONS
Ashland’s
divestiture of APAC during 2006 qualified as a discontinued
operation. As a result, the previous operating results, assets and
liabilities related to APAC have been reflected as discontinued operations in
the Consolidated Financial Statements. Ashland has made subsequent
adjustments to the gain on the sale of APAC, primarily relating to the tax
effects of the sale, during 2009, 2008 and 2007. Such adjustments may
continue to occur in future periods and 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, and from the acquisition
during 2009 of Hercules, a wholly owned subsidiary of
Ashland. Additional adjustments to the recorded litigation reserves
and related insurance receivables continue annually and primarily reflect
updates to the estimates. See Note P for further discussion of
Ashland’s asbestos-related activity including assumed Hercules
obligations.
During
2009, Ashland recorded two adjustments that related to prior periods within the
discontinued operations caption of the Statement of Consolidated
Income. These included a charge related to a change in the duration
period on a retained environmental liability from the Electronic Chemicals
business (divested in 2003) and a charge related to a tax basis adjustment from
the APAC divestiture. Ashland assessed the affect these adjustments
had on income from discontinued operations and net income in the current and
prior periods and, after considering quantitative and qualitative factors,
determined such adjustments to be below the threshold that would necessitate a
restatement of the consolidated financial statements for the prior
years. Ashland also considered the impact of these prior period
adjustments on its internal controls and financial reporting and based on
qualitative and quantitative factors, including the discrete nature of the
transactions involved, concluded that the matters did not indicate a material
weakness in internal controls over financial reporting.
Components
of amounts reflected in the Statements of Consolidated Income related to
discontinued operations are presented in the following table for each of the
years ended September 30.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Income
(loss) from discontinued operations
|
||||||||||||
|
APAC
|
$ | 1 | $ | - | $ | - | ||||||
|
Asbestos-related
litigation reserves, expenses and related receivables
|
2 | (11 | ) | 35 | ||||||||
|
Loss
on disposal of discontinued operations
|
||||||||||||
|
APAC
|
- | - | (6 | ) | ||||||||
|
Electronic
Chemicals
|
(4 | ) | - | (1 | ) | |||||||
|
Income
(loss) before income taxes
|
(1 | ) | (11 | ) | 28 | |||||||
|
Income
tax (expense) benefit
|
||||||||||||
|
Benefit
(expense) related to income (loss) from discontinued
operations
|
||||||||||||
|
APAC
|
(1 | ) | 1 | 2 | ||||||||
|
Asbestos-related
litigation reserves and expenses
|
- | 9 | - | |||||||||
|
Benefit
(expense) related to gain (loss) on disposal of discontinued
operations
|
||||||||||||
|
APAC
|
(6 | ) | (7 | ) | (1 | ) | ||||||
|
Electronic
Chemicals
|
1 | - | - | |||||||||
|
Income
(loss) from discontinued operations (net of income taxes)
|
$ | (7 | ) | $ | (8 | ) | $ | 29 | ||||
NOTE
F – UNCONSOLIDATED AFFILIATES
Summarized
financial information for companies accounted for on the equity method is
presented in the following table, along with a summary of the amounts recorded
in Ashland’s Consolidated Financial Statements. At September 30,
2009 and 2008, Ashland’s retained earnings included $45 million and $48 million,
respectively, of undistributed earnings from unconsolidated affiliates accounted
for on the equity method.
F-20
The
summarized financial information for all companies accounted for on the equity
method by Ashland is as of and for the years ended September 30, 2009, 2008
and 2007, respectively.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Financial
position
|
||||||||||||
|
Current
assets
|
$ | 226 | $ | 254 | ||||||||
|
Current
liabilities
|
(89 | ) | (120 | ) | ||||||||
|
Working
capital
|
137 | 134 | ||||||||||
|
Noncurrent
assets
|
66 | 71 | ||||||||||
|
Noncurrent
liabilities
|
(8 | ) | (9 | ) | ||||||||
|
Stockholders'
equity
|
$ | 195 | $ | 196 | ||||||||
|
Results
of operations
|
||||||||||||
|
Sales
and operating revenues
|
$ | 517 | $ | 655 | $ | 514 | ||||||
|
Income
from operations
|
52 | 75 | 51 | |||||||||
|
Net
income
|
32 | 52 | 42 | |||||||||
|
Amounts
recorded by Ashland
|
||||||||||||
|
Investments
and advances
|
$ | 79 | $ | 81 | $ | 73 | ||||||
|
Equity
income
|
14 | 23 | 15 | |||||||||
|
Distributions
received
|
15 | 13 | 10 | |||||||||
NOTE
G – FAIR VALUE MEASUREMENTS
As
required by U.S. GAAP, Ashland uses applicable guidance for defining fair value,
the initial recording and periodic remeasurement of certain assets and
liabilities measured at fair value and related disclosures for instruments
measured at fair value. Fair value accounting guidance establishes a
fair value hierarchy, which prioritizes the inputs to valuation techniques used
to measure fair value into three broad levels. The fair value
hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). An instrument’s categorization within
the fair value hierarchy is based upon the lowest level on input that is
significant to the instrument’s fair value measurement. The three
levels within the fair value hierarchy are described as follows.
Level 1 – Observable
inputs such as unadjusted quoted prices in active markets for identical assets
or liabilities.
Level 2 – Inputs
other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets and quoted
prices for identical or similar assets or liabilities in markets that are not
active.
Level 3 – Unobservable
inputs for the asset or liability for which there is little, if any, market
activity at the measurement date. Unobservable inputs reflect
Ashland’s own assumptions about what market participants would use to price the
asset or liability. The inputs are developed based on the best
information available in the circumstances, which might include Ashland’s own
financial data such as internally developed pricing models, discounted cash flow
methodologies, as well as instruments for which the fair value determination
requires significant management judgment.
For
assets that are measured using quoted prices in active markets (Level 1), the
total fair value is the published market price per unit multiplied by the number
of units held without consideration of transaction costs. Assets and
liabilities that are measured using significant other observable inputs (Level
2) are primarily valued by reference to quoted prices of similar assets or
liabilities in active markets, adjusted for any terms specific to that asset or
liability. For all other assets and liabilities for which
unobservable inputs are used (Level 3), fair value is derived through the use of
fair value models, such as a discounted cash flow model or other standard
pricing models that Ashland deems reasonable.
F-21
NOTE
G – FAIR VALUE MEASUREMENTS (continued)
The
following table summarizes financial asset instruments subject to recurring fair
value measurements as of September 30, 2009. Ashland did not have any
financial liability instruments subject to recurring fair value measurements as
of September 30, 2009.
|
(In
millions)
|
Carrying
Value
|
Total
fair
value
|
Quoted
prices
in
active
markets
for
identical
assets
Level
1
|
Significant
other
observable
inputs
Level
2
|
Significant
unobservable
inputs
Level
3
|
|||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 352 | $ | 352 | $ | 352 | $ | - | $ | - | ||||||||||
|
Auction
rate securities
|
170 | 170 | - | - | 170 | |||||||||||||||
|
Deferred
compensation investments (a)
|
175 | 175 | 69 | 106 | - | |||||||||||||||
|
Investment
of captive insurance company (a)
|
3 | 3 | 3 | - | - | |||||||||||||||
|
Total
assets at fair value
|
$ | 700 | $ | 700 | $ | 424 | $ | 106 | $ | 170 | ||||||||||
(a) Included
in other noncurrent assets in the Consolidated Balance Sheets.
Level
3 instruments
Auction
rate securities
At
September 30, 2009, Ashland held at par value $192 million student loan auction
rate securities for which there was not an active market with consistent
observable inputs. 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 this time, the market for auction rate securities has
failed to achieve equilibrium. As of September 30, 2008, Ashland had
recorded, as a component of stockholders’ equity, a temporary $32 million
unrealized loss on the portfolio. As of that date, all the student
loan instruments held by Ashland were AAA rated and collateralized by student
loans which are substantially guaranteed by the U.S. government under the
Federal Family Education Loan Program. Ashland’s estimate of fair
value for auction rate securities as of September 30, 2008 was based on various
internal discounted cash flow models and relevant observable market prices and
quotes. The assumptions within the models include credit quality,
liquidity, estimates on the probability of each valuation model and the impact
due to extended periods of maximum auction rates.
During
the first quarter of 2009, Ashland liquidated $20 million (par value) auction
rate securities for $18 million in cash proceeds and recognized a loss of
$2 million, which was the recorded book value of this instrument. As
a result of this sale, as well as Ashland’s current debt structure following the
Hercules acquisition and the ongoing impact from the current global economic
downturn, Ashland also determined in this quarter that it no longer had the
intent to hold these instruments until their maturity date. As a
result, Ashland recorded the remaining $30 million unrealized loss as a
permanent realized loss in the other expenses caption of the Consolidated
Statement of Income. A full valuation allowance was established for
this tax benefit at December 31, 2008 because for tax purposes Ashland did not
have capital gains to offset this capital loss. For further
information on income taxes, see Note L.
During
2009, Ashland sold $83 million (par value) auction rate securities for $73
million in cash proceeds which approximated book value. In addition,
during 2009, Ashland signed an agreement with UBS Financial Services, Inc.
agreeing to sell a $5 million (par value) auction rate instrument at its par
value on or before June 30, 2010. As a result, Ashland recorded a
minimal unrealized gain associated with this settlement.
At
September 30, 2009 and 2008, auction rate securities totaled $170 million and
$243 million, respectively, and were classified as noncurrent assets in the
Consolidated Balance Sheets. Due to the uncertainty as to when active
trading will resume in the auction rate securities market, Ashland continues to
believe the recovery period for certain of these securities may extend beyond a
twelve-month period. As a result, Ashland classified these
instruments as noncurrent at September 30, 2009 and 2008 in the
Consolidated Balance Sheets. At September 30, 2009, scheduled
maturities for auction rate securities were as follows:
|
(In
millions)
|
Amortized
cost
|
Fair
value
|
||||||
|
Over
10 years
|
$ | 192 | $ | 170 | ||||
F-22
The
following table provides a reconciliation of the beginning and ending balances
of Ashland’s auction rate securities, as these are Ashland’s only assets
measured at fair value using significant unobservable inputs (Level
3).
|
(In
millions)
|
Level
3
|
|||
|
Balance
as of October 1, 2008 (par value)
|
$ | 275 | ||
|
Unrealized
losses as of October 1, 2008 included in other comprehensive
income
|
(32 | ) | ||
|
Recorded
balance as of October 1, 2008
|
243 | |||
|
Transfers
in and/or (out) of Level 3
|
- | |||
|
Total
losses charged in the Consolidated Statement of Income
|
(32 | ) | ||
|
Total
reversal of losses included in other comprehensive income
|
32 | |||
|
Sales
of auction rate securities
|
(73 | ) | ||
|
Balance
as of September 30, 2009
|
$ | 170 | ||
Derivative
and hedging activities
Currency
Hedges
Ashland
conducts business in a variety of foreign currencies. Accordingly,
Ashland regularly uses foreign currency derivative instruments to manage
exposure on certain transactions denominated in foreign currencies to curtail
the earnings volatility effects of short-term assets and liabilities denominated
in currencies other than Ashland’s functional currency (the U.S.
dollar).
Ashland
contracts with counter-parties to buy and sell foreign currencies to offset the
impact of exchange rate changes on transactions denominated in non-functional
currencies, including short-term inter-company loans. These contracts
generally require exchange of one foreign currency for another at a fixed rate
at a future date and generally have maturities of less than twelve
months. All contracts are marked-to-market with net changes in fair
value recorded within the selling, general and administrative expenses
caption. During 2009, a gain of $5 million was recorded in the
Statement of Consolidated Income for these contracts within the selling, general
and administrative expense caption. The impacts of these contracts
were largely offset by gains and losses resulting from the impact of changes in
exchange rates on transactions denominated in non-functional
currencies. The net loss position on foreign currency derivatives
outstanding in the Consolidated Balance Sheet as of September 30, 2009 was less
than $1 million (consisting of a gain of $1 million with a notional amount
of $43 million offset by a loss of $1 million with a notional amount of $73
million) and was included in other noncurrent liabilities. As of
September 30, 2009, there were no open foreign currency derivatives which
qualified for hedge accounting treatment.
Interest
Rate Hedges
During
2009, Ashland purchased a three year interest rate cap on a notional amount of
$300 million of variable rate debt. This interest rate cap fixes
Ashland’s interest rate on that outstanding variable interest rate debt when
LIBOR interest rates equal or exceed 7% on a reset date. Pursuant to
the senior credit agreement (described in more detail in Note I), within
90 days of November 13, 2008, Ashland was required to enter into and
maintain interest rate swap contracts in an amount sufficient to result in not
less than 50% of the aggregated outstanding indebtedness for borrowed money
(excluding amounts borrowed under the revolving credit facility) being subject
to interest at a fixed rate until the maturity thereof, whether by the terms of
such indebtedness or by the terms of such interest rate swap contracts for an
initial period of no less than three years. This interest rate cap
qualifies as an interest rate swap within the provisions of the senior credit
agreement.
This
instrument does not qualify for hedge accounting and therefore gains or losses
reflecting changes in fair value, along with the amortization of the upfront
premium paid by Ashland to purchase the instrument, are reported in the
Statements of Consolidated Income within the net interest and other financing
(expense) income caption. As of September 30, 2009, the fair
value on the interest rate cap was less than $1 million and recorded within
the other noncurrent assets caption of the Consolidated Balance
Sheet.
Other
financial instruments
At
September 30, 2009 and 2008, Ashland’s long-term debt had a carrying value of
$1,590 million and $66 million, respectively, compared to a fair value of $1,751
million and $68 million, respectively. The fair values of long-term
debt are based on quoted market prices or, if market prices are not available,
the present values of the underlying cash flows discounted at Ashland’s
incremental borrowing rates.
F-23
NOTE
H – GOODWILL AND OTHER INTANGIBLES
In
accordance with U.S. GAAP, Ashland reviews goodwill and other intangible assets
for impairment either annually or when events and circumstances indicate an
impairment may have occurred. This annual assessment is performed as
of July 1 and consists of Ashland determining each reporting unit’s current
fair value compared to its current carrying value. Ashland has
determined its reporting units for allocation of goodwill include the Functional
Ingredients, Water Technologies, Consumer Markets and Distribution reportable
segments. Within the Performance Materials reportable segment,
because further discrete financial information is provided and management
regularly reviews this information, this reportable segment is further broken
down into the Casting Solutions and Composites and Adhesives reporting
units.
When
externally quoted market prices of Ashland’s reporting units are not readily
available, Ashland makes various estimates and assumptions in determining the
estimated fair values of those units. Historically, Ashland has used
a market multiples valuation technique. Fair values were based
principally on EBITDA (earnings before interest, taxes, depreciation and
amortization) multiples of industry peer group companies for each of these
reporting units and, as deemed necessary, a discounted cash flow
model. Based upon recent market conditions, Ashland determined during
2008 that a discounted cash flow model was a more representative valuation model
to currently determine a business’ fair value. Discounted cash flow
models are highly reliant on various assumptions. Significant
assumptions Ashland utilized in these models included: projected
business results and future industry direction, long-term growth factors and
Ashland’s weighted-average cost of capital. Ashland uses assumptions
that it deems to be conservative estimates of likely future events and compares
the total fair values of each reporting unit to Ashland’s market capitalization,
and implied control premium, to determine if the fair values are reasonable
compared to external market indicators.
In
conjunction with the July 1 annual assessment of goodwill, Ashland’s valuation
techniques did not indicate any impairment. However, the Functional
Ingredients and Water Technologies reporting units did indicate results that
were close to their carrying values, although Ashland believes this to be a
reasonable result from the model based on these reporting units’ purchase during
2009. A negative 1% change in either the long-term growth factor or
weighted-average cost of capital assumptions for these two reporting units would
have resulted in a fair value at or slightly below Ashland’s current carrying
value of these reporting units. Ashland recognizes that its current
market capitalization at September 30, 2009 is below the carrying value of
equity. However, Ashland believes that the assumptions and
determinations used to fair value Ashland’s reporting units have been based on
valuation methodologies, principles and practices standard within the current
market place for valuing businesses.
Ashland’s
assessment of an impairment charge on any of these assets currently classified
as having indefinite lives, including goodwill, could change in future periods
if any or all of the following events were to occur with respect to a particular
reporting unit: divestiture decision, negative change in Ashland’s
weighted-average cost of capital rates, growth rates or other assumptions,
continued economic deterioration that is more severe or of a longer duration
than anticipated, or another significant economic event. Significant
future charges for impairments could impact Ashland’s ability to comply with the
minimum consolidated net worth covenant, which is disclosed further in Note
I.
During
2009, Ashland’s purchase of Hercules increased goodwill by $1,806
million. In connection with the goodwill associated with this
acquisition, Ashland determined that a certain amount of the goodwill should be
allocated to all reporting units because each reporting unit will benefit from
synergies related to the acquisition that will increase these businesses’
overall reported profitability. Ashland calculated the increased
value each reporting unit is expected to receive from the estimated synergy
savings in determining the appropriate amount of goodwill to allocate for this
transaction.
The
following is a progression of goodwill by segment for the years ended September
30, 2009 and 2008.
|
(In
millions)
|
Functional
Ingredients
|
Water
Technologies
|
(a) |
Performance
Materials
|
(b) |
Consumer
Markets
|
Distribution
|
Total
|
||||||||||||||||
|
Balance
at September 30, 2007
|
$ | - | $ | 54 | $ | 166 | $ | 30 | $ | 1 | $ | 251 | ||||||||||||
|
Acquisitions
|
- | 1 | 28 | - | - | 29 | ||||||||||||||||||
|
Currency
translation adjustment
|
- | 1 | 2 | - | - | 3 | ||||||||||||||||||
|
Balance
at September 30, 2008
|
- | 56 | 196 | 30 | 1 | 283 | ||||||||||||||||||
|
Acquisitions
|
1,030 | 515 | 97 | 85 | 79 | 1,806 | ||||||||||||||||||
|
Currency
translation adjustment
|
76 | 55 | - | - | - | 131 | ||||||||||||||||||
|
Balance
at September 30, 2009
|
$ | 1,106 | $ | 626 | $ | 293 | $ | 115 | $ | 80 | $ | 2,220 | ||||||||||||
|
(a)
|
Excludes
goodwill of $16 million as of September 30, 2008 associated with the Drew
Marine sale during 2009 that has been classified within assets held for
sale.
|
|
(b)
|
Goodwill
consisted of $51 million and $242 million, respectively, for the Casting
Solutions and Composites and Adhesives reporting
units.
|
Intangible
assets principally consist of trademarks and trade names, intellectual property,
customer lists and sale contracts. Intangibles are amortized on a
straight-line basis over their estimated useful lives. The cost of
trademarks and trade names is amortized principally over 15 to 25 years,
intellectual property over 5 to 20 years, customer relationships
over
F-24
3 to 24
years and other intangibles over 2 to 50 years. As part of recording
the Hercules acquisition during 2009, Ashland recorded $1,116 million in
intangible assets of which $255 million were related to indefinite-lived
assets. Ashland reviews intangible assets for possible impairment
whenever events or changes in circumstances indicate that carrying amounts may
not be recoverable. In conjunction with the July 1 annual assessment
of indefinite-lived intangible assets, Ashland’s model did not indicate any
impairment. Intangible assets were comprised of the following as of
September 30, 2009 and 2008.
| 2009 | 2008 | |||||||||||||||||||||||
|
(In
millions)
|
Gross
carrying
amount
|
Accumulated
amortization
|
Net
carrying
amount
|
Gross
carrying
amount
|
Accumulated
amortization
|
Net
carrying
amount
|
||||||||||||||||||
|
Trademarks
and trade names
|
$ | 353 | $ | (24 | ) | $ | 329 | $ | 67 | $ | (22 | ) | $ | 45 | ||||||||||
|
Intellectual
property
|
331 | (41 | ) | 290 | 54 | (21 | ) | 33 | ||||||||||||||||
|
Customer
relationships
|
586 | (40 | ) | 546 | 13 | (3 | ) | 10 | ||||||||||||||||
|
Other
intangibles
|
63 | (24 | ) | 39 | 38 | (17 | ) | 21 | ||||||||||||||||
|
Total
intangible assets
|
$ | 1,333 | $ | (129 | ) | $ | 1,204 | $ | 172 | $ | (63 | ) | $ | 109 | ||||||||||
Amortization
expense recognized on intangible assets was $68 million for 2009, $11 million
for 2008 and $11 million for 2007, and is primarily included in the selling,
general and administrative expense caption of the Statements of Consolidated
Income. As of September 30, 2009, 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 $290 million and $35 million as
of September 30, 2009 and 2008, respectively. In accordance with U.S.
GAAP, Ashland annually reviews these assets to determine whether events and
circumstances continue to support the indefinite useful life
designation. Estimated amortization expense for future periods is $66
million in 2010, $64 million in 2011, $63 million in 2012, $62 million in 2013
and $60 million in 2014.
NOTE
I – DEBT
In
conjunction with the acquisition of Hercules on November 13, 2008, Ashland
secured $2,600 million in financing from Bank of America Securities LLC, Scotia
Capital (USA) Inc. and other lenders consisting of a $400 million revolving
credit facility, a $400 million term loan A facility, an $850 million term loan
B facility, a $200 million accounts receivable securitization facility and
a $750 million bridge loan, that was subsequently replaced with the issuance of
$650 million senior unsecured bonds in May 2009. The total debt drawn
upon the closing of the acquisition was $2,300 million which included
amounts used to fund the $594 million extinguishment of certain debt
instruments that Hercules held as of the closing date. The remaining
Hercules debt inherited as part of the acquisition was recorded at its fair
value of $205 million as of the acquisition date. The following table
summarizes Ashland’s current and long-term debt at September 30, 2009 and
2008.
|
|
2009
|
2008
|
||||||
|
Term
loan A, due 2013 (a)
|
$ | 219 | $ | - | ||||
|
Term
loan B, due 2014 (a)
|
542 | - | ||||||
|
6.60%
notes, due 2027 (b)
|
12 | - | ||||||
|
9.125%
notes, due 2017
|
628 | - | ||||||
|
Medium-term
notes, due 2013-2019, interest at a weighted-
|
||||||||
|
average
rate of 8.4% at September 30, 2009 (7.7% to 9.4%)
|
21 | 21 | ||||||
|
8.80%
debentures, due 2012
|
20 | 20 | ||||||
|
6.86%
medium-term notes, Series H, due 2009
|
- | 17 | ||||||
|
Hercules
Tianpu - term notes, due through 2011 (b)
|
19 | - | ||||||
|
6.50%
junior subordinated notes, due 2029 (b)
|
125 | - | ||||||
|
International
revolver agreements
|
22 | - | ||||||
|
Other
|
5 | 8 | ||||||
|
Total
debt
|
1,613 | 66 | ||||||
|
Short-term
debt
|
(23 | ) | - | |||||
|
Current
portion of long-term debt
|
(53 | ) | (21 | ) | ||||
|
Long-term
debt (less current portion)
|
$ | 1,537 | $ | 45 | ||||
(a)Senior credit facilities.
(b) Hercules
retained instruments.
F-25
NOTE
I – DEBT (continued)
At
September 30, 2009, Ashland’s total debt had an outstanding principal balance of
$1,796 million and discounts of $183 million. The scheduled aggregate
maturities of debt for the next five fiscal years are as follows: $76
million in 2010, $66 million in 2011, $64 million in 2012, $95 million
in 2013 and $536 million in 2014.
Senior
credit facilities
The
senior credit agreement provides for an aggregate principal amount of $1,650
million in senior credit facilities, consisting of a $400 million five-year term
loan A facility, an $850 million five and one-half year term loan B facility and
a $400 million five-year revolving credit facility.
The term
loan A facility was drawn in full on November 13, 2008 and is required to be
repaid by Ashland in consecutive quarterly installments which commenced on
March 31, 2009, with approximately 15% of the outstanding principal amount
to be repaid during each of years one and two, approximately 20% of the
outstanding principal amount to be repaid during year three, and approximately
25% of the outstanding principal amount to be repaid during each of years four
and five, with a final payment of any outstanding principal and interest on
November 13, 2013. The term loan B facility was drawn in full on
November 13, 2008 and is required to be repaid by Ashland in consecutive
quarterly installments which commenced on March 31, 2009, with an aggregate
annual amount equal to approximately 1% of the outstanding principal amount of
the term loan B facility to be repaid in each of the first five years,
approximately 0.25% of the outstanding principal amount of the term loan B
facility to be repaid in the first quarter of the sixth year, with the final
payment of any outstanding principal and interest on May 13,
2014. The senior credit facilities have been secured by a first
priority security interest in substantially all of the personal property assets,
and certain of the real property assets, of Ashland and the subsidiaries who
have guaranteed the loans made under the credit agreement, including the capital
stock or other equity interests of certain of Ashland’s U.S. and first-tier
foreign subsidiaries and a portion of the stock of certain of Ashland’s other
first-tier foreign subsidiaries.
At
Ashland’s option, the term loan A and B facilities will bear interest at either
the alternate base rate or LIBOR, plus the applicable interest
margin. The alternate base rate will be the highest of (1) the
Federal Funds Rate as published by the Federal Reserve Bank of New York plus
one-half of 1%, (2) the prime commercial lending rate of Bank of America,
National Association, as established from time to time and (3) the
one-month LIBOR rate. Interest on alternate base rate loans will be
payable quarterly in arrears. LIBOR will be the British Banker’s
Association LIBOR Rate, as published by Reuters (or other commercially available
source) and if such rate is not available, then it will be determined by the
Administrative Agent at the start of each interest period and will be fixed
through such period. Interest on LIBOR loans will be paid at the end
of each interest period, but if any interest period exceeds three months, then
interest on LIBOR loans also will be paid every three months. The
alternative base rate can never be lower than 4.25% and LIBOR can never be lower
than 3.25%, effectively establishing a floor on the interest rates to be
paid. The applicable margin for the revolving credit facility and the
term loan A ranges from 1.75% to 2.75% per annum in the case of base rate loans
and 2.75% to 3.75% per annum for LIBOR loans, based upon the Consolidated
Leverage Ratio (as defined in the senior credit agreement) with the initial
applicable margin of 2.50% in the case of base rate loans and 3.50% in the case
of LIBOR loans. At the inception of the agreement, the applicable
margin for the term loan B was 3% per annum in the case of base rate loans and
4% for LIBOR loans.
During
2009, the senior credit facility was amended to increase the applicable margin
for term B loans from 3% to 3.40% for base rate loans and from 4% to 4.40% for
LIBOR loans. Ashland agreed to this increase in exchange for reduced
flexibility on behalf of the lenders to convert a portion of the term B loans to
interim loans or long-term securities. Additionally, the senior
credit facility was amended to revise the definition of “Consolidated EBITDA” to
include an adjustment for “noncash equity compensation expense” and to also
provide for more integration costs associated with the Hercules acquisition
during the first year after the acquisition. In exchange, Ashland
agreed to limit Capital Expenditures in fiscal 2010 to no more than
$250 million, excluding allowable previous year
carryforwards. As of September 30, 2009, the interest rates on the
term loan A and term loan B were 6.50% and 7.65%, respectively.
The term
loan A facility and the revolving credit facility may be prepaid at any time
without penalty. If Ashland refinances or makes an optional
prepayment of all or any portion of the term loan B facility, Ashland must pay a
prepayment premium equal to either 2% of the principal amount of the term loan B
facility prepaid if such prepayment is made on or prior to November 13,
2009, or 1% of the principal amount of the term loan B facility prepaid if such
prepayment is made after November 13, 2009 but on or prior to
November 13, 2010. The senior credit facilities are subject to
mandatory prepayment with specified percentages of the net cash proceeds of
certain asset dispositions, casualty events, extraordinary receipts and debt and
equity issuances and, in certain circumstances, with excess cash flow, in each
case subject to certain conditions. During 2009, Ashland repaid
$142 million of the term loan A facility and $303 million of the term
loan B facility, respectively. Prepayment fees are recorded as
part of interest expense in the Statements of Consolidated Income and were $1
million for 2009.
F-26
Ashland’s
revolving credit agreement provides for up to $400 million in
borrowings. Total borrowing capacity remaining under the $400 million
revolving credit facility was $264 million, after reduction of the facility by
$136 million for letters of credit outstanding at September 30,
2009. This revolving credit agreement expires in 2013.
Senior
unsecured notes
In May
2009, Ashland issued $650 million aggregate principal amount of 9.125% senior
unsecured notes due 2017. The notes were issued at 96.577% of the
aggregate principal amount to yield 9.75%. Ashland may redeem some or
all of the notes at any time on or after June 1, 2013 at certain fixed
redemption prices. The notes will mature on June 1, 2017 and rank
equally with other unsecured and unsubordinated senior
obligations. Ashland used the net proceeds from this issuance,
together with available liquidity, to repay the $750 million bridge loan
facility entered into as part of the interim credit agreement in connection with
the closing of the Hercules acquisition on November 13, 2008. The
interim credit agreement for the bridge loan facility provided $750 million of
unsecured senior interim loans at a rate of 9% per annum through
November 13, 2009, the interim loan maturity date. Upon
termination of the bridge facility, Ashland expensed the remaining $10 million
of debt issuance cost related to the loan fees paid to originate the bridge loan
facility, which was included in the net interest and other financing (expense)
income caption in the Statements of Consolidated Income.
Hercules
retained instruments
Upon
completion of the Hercules acquisition, Ashland assumed the following Hercules
debt facilities: 6.60% notes due 2027, 6.50% junior subordinated
deferrable interest debentures due 2029, term loans of Hercules Tianpu at rates
ranging from 1.73% to 6.86% through 2011, and term loans of Hercules Jiangmen at
rates ranging from 1.17% to 6.97% through 2010.
The 6.5%
junior subordinated deferrable interest debentures due 2029 (the 6.5%
debentures) had an initial issue price of $741.46 and have a redemption price of
$1,000. The 6.5% debentures were initially issued to Hercules Trust
II (Trust II), a subsidiary trust established in 1999. Trust II had
issued, in an underwritten public offering, 350,000 CRESTSSM
Units, each consisting of a 6.5% preferred security of Trust II and a warrant
(exercisable through 2029) to purchase 23.4192 shares of the Hercules Common
Stock for the equivalent of $42.70 per share. The preferred
securities and the warrants were separable and were initially valued at $741.46
and $258.54, respectively. In connection with the Hercules
dissolution and liquidation of Trust II in December 2004, Trust II distributed
the 6.5% debentures to the holders of the preferred securities and the preferred
securities were cancelled. The CRESTSSM
Units now consist of the 6.5% debentures and the warrants, both of which were
fair valued in conjunction with the Hercules acquisition. Ashland
will accrete the difference between the $282 million par value and the $124
million recorded fair value of the 6.5% debentures over the remaining
term.
Hercules
Tianpu, a joint venture, and Hercules Jiangmen are consolidated within Ashland’s
Consolidated Financial Statements. Loans issued by Hercules Tianpu
are guaranteed by Ashland for approximately 55% of the outstanding
balances. The loans are denominated in Renminbi and U.S. dollar
equivalents.
Accounts
Receivable Securitization
In
conjunction with the senior credit agreement, on November 13, 2008, Ashland
entered into a $200 million accounts receivable securitization facility pursuant
to: (1) a sale agreement between Ashland and CVG Capital II LLC (CVG), a
wholly-owned special purpose subsidiary consolidated within Ashland, and
(2) a transfer and administration agreement among CVG, Ashland, certain
conduit investors and uncommitted investors, each of Bank of America, National
Association and The Bank of Nova Scotia, as a letter of credit issuer, a
managing agent, an administrator and a committed investor, and Bank of America,
National Association, as agent for various secured parties.
As part
of the receivables securitization facility, Ashland may sell, on an ongoing
basis, a portion of its accounts receivable, certain related assets and the
right to the collections on those accounts receivable to CVG. Under
the terms of the Transfer and Administration agreement, CVG may, from time to
time, obtain up to $200 million (in the form of cash or letters of credit for
the benefit of Ashland and its other subsidiaries) from the conduit investors,
the uncommitted investors and/or the committed investors through the sale of its
interest in such receivables, related assets and collections or by financing
those receivables, related assets and rights to collection. The
receivables securitization facility had an initial term of 364 days that was
renewed on November 4, 2009 for an additional 364-day period.
Ashland
continues to classify any borrowings under this facility as a short-term debt
instrument within its Consolidated Balance Sheet. All transfers are
accounted for as secured borrowings and the receivables sold pursuant to the
securitization facility are included in the Consolidated Balance Sheet as
accounts receivable. Fundings under the Transfer and Administration
agreement are repaid as accounts receivable are collected, with new fundings
being advanced (through daily reinvestments) as new accounts receivable are
originated by Ashland and sold to CVG, with settlement generally occurring
monthly. Once accounts receivable are sold to CVG by Ashland, the
receivables, related assets and rights to collection are separate and distinct
from Ashland’s own assets and are not available to creditors of
Ashland. At September 30, 2009, the
F-27
NOTE
I – DEBT (continued)
outstanding
amount of accounts receivable sold by Ashland to CVG was $311 million for
which Ashland had no outstanding draws on the approximate $198 million in
available funding from qualifying receivables.
Other
debt
During
2006, Ashland entered into an in-substance defeasance of approximately
$49 million to repay current and long-term debt that had a carrying value
of $44 million on the balance sheet. Because the transaction was not
a legal defeasance the investment has been placed into a trust and will be
exclusively restricted to future obligations and repayments related to these
debt instruments. The investments have been classified on the balance
sheet as other current assets or other noncurrent assets based on the
contractual debt repayment schedule. At September 30, 2009 and 2008,
the carrying value of the investments to defease debt, was $18 million and $36
million, respectively. The carrying value of the debt was $13 million
and $31 million as of September 30, 2009 and 2008, respectively.
Net
interest and other financing (expense) income
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Interest
income
|
$ | 21 | $ | 40 | $ | 59 | ||||||
|
Interest
expense
|
(215 | ) | (9 | ) | (10 | ) | ||||||
|
Other
financing costs
|
(11 | ) | (3 | ) | (3 | ) | ||||||
| $ | (205 | ) | $ | 28 | $ | 46 | ||||||
Included
in interest expense for the year ended September 30, 2009 was $52 million in
debt amortization costs, of which $8 million related to accelerated amortization
from prepayments made on both the term loan A and term loan B facility and
$10 million relates to the previously mentioned extinguishment of the bridge
loan facility in May 2009.
Covenants
related to debt agreements
As a
result of the financing and subsequent debt issued to complete the Hercules
acquisition during 2009, Standard & Poor’s and Moody’s Investor Services
downgraded Ashland’s corporate credit rating to BB- and Ba2,
respectively. In addition, Ashland is now subject to certain
restrictions from various debt covenants. These covenants include
certain affirmative covenants such as various internal certifications,
maintenance of property, preferential security interest in acquired property and
applicable insurance coverage as well as negative covenants that include
financial covenant restrictions associated with leverage and fixed charge
coverage ratios, total net worth and capital expenditure levels and restrictions
on future dividend payments and stock repurchases. As of September
30, 2009, Ashland is in compliance with all debt agreement covenant
restrictions. The financial covenant restrictions are summarized in
the following tables.
The
following describes the maximum consolidated leverage ratio permitted under
Ashland’s senior credit agreement by associated period:
|
Maximum
consolidated
leverage
ratio
|
||||||||||||||
|
For
fiscal quarters ending:
|
||||||||||||||
|
Funding
date through September 30, 2009
|
3.75:1.00
|
|||||||||||||
|
December
31, 2009 through September 30, 2010
|
3.50:1.00
|
|||||||||||||
|
December
31, 2010 through September 30, 2011
|
3.00:1.00
|
|||||||||||||
|
December
31, 2011 through September 30, 2012
|
2.75:1.00
|
|||||||||||||
|
December
31, 2012 and each fiscal quarter thereafter
|
2.50:1.00
|
|||||||||||||
The
following describes Ashland’s September 2009 calculation of the consolidated
leverage ratio per the senior credit agreement and reconciliation of
Consolidated EBITDA (as defined by the senior credit agreement, as amended) to
net income: Ashland has included certain non-U.S. GAAP information
below to assist in the understanding of various financial debt covenant
calculations.
F-28
|
(In
millions, except ratios) (a)
|
Q1'09
|
Q2'09
|
Q3'09
|
Q4'09
|
Total
|
Covenant
ratio
|
||||||||||||||||||
|
Debt/EBITDA
|
||||||||||||||||||||||||
|
Consolidated
EBITDA
|
$ | 155 | $ | 227 | $ | 266 | $ | 304 | $ | 952 | ||||||||||||||
|
Debt
|
2,473 | 2,266 | 2,021 | 1,642 | 1,642 | |||||||||||||||||||
|
Debt/EBITDA
|
1.7 | x | 3.75 | x | ||||||||||||||||||||
|
max.
|
||||||||||||||||||||||||
|
Reconciliation
of Consolidated EBITDA:
|
||||||||||||||||||||||||
|
(In
millions)
|
Q1'09
|
Q2'09
|
Q3'09
|
Q4'09
|
||||||||||||||||||||
|
Net
(loss) income
|
$ | (119 | ) | $ | 48 | $ | 50 | $ | 93 | |||||||||||||||
|
Key
items excluded (b)
|
82 | (1 | ) | 3 | - | |||||||||||||||||||
|
Consolidated
interest charges
|
35 | 56 | 64 | 63 | ||||||||||||||||||||
|
Income
taxes (benefit) expense
|
(1 | ) | 9 | 40 | 39 | |||||||||||||||||||
|
Depreciation
and amortization
|
63 | 93 | 88 | 85 | ||||||||||||||||||||
|
Hercules
stub-period results (c)
|
34 | - | - | - | ||||||||||||||||||||
|
Other
nonrecurring or noncash charges (d)
|
61 | 22 | 21 | 24 | ||||||||||||||||||||
|
Total
consolidated EBITDA
|
$ | 155 | $ | 227 | $ | 266 | $ | 304 | ||||||||||||||||
|
Reconciliation
of Debt:
|
||||||||||||||||||||||||
|
(In
millions)
|
Q1'09
|
Q2'09
|
Q3'09
|
Q4'09
|
||||||||||||||||||||
|
Total
debt (long-term and short-term)
|
$ | 2,468 | $ | 2,262 | $ | 1,993 | $ | 1,613 | ||||||||||||||||
|
Defeased
debt
|
(31 | ) | (31 | ) | (13 | ) | (13 | ) | ||||||||||||||||
|
Guarantees
(bank and third party)
|
36 | 35 | 41 | 42 | ||||||||||||||||||||
| $ | 2,473 | $ | 2,266 | $ | 2,021 | $ | 1,642 | |||||||||||||||||
|
(a)
|
All
numbers adjusted to reflect terminology and calculation methodology
governing the senior credit agreement, included in a Form 8-K filed on
November 21, 2008, as amended.
|
|
(b)
|
Excludes
certain income or costs that have been specifically identified within the
senior credit agreement, as
amended.
|
|
(c)
|
In
accordance with the senior credit agreement, Hercules’ financial results
from October 1, 2008 through November 13, 2008, which is the period of
time during Ashland’s first quarter that it did not own Hercules, have
been included within this
calculation.
|
|
(d)
|
Includes
certain nonrecurring or noncash transactions, including restructuring and
integration charges, defined within the senior credit
agreement. Allowable restructuring and integration charges are
capped, per the senior credit agreement, as amended, not to exceed $80
million during the three fiscal year period ending September 30,
2011. Ashland incurred approximately $65 million of
qualifying restructuring and integration expenses in
2009.
|
The
permitted consolidated fixed charge coverage ratio as of the end of any fiscal
quarter for Ashland is as follows under Ashland’s senior credit
agreement.
|
Minimum
consolidated
fixed
charge
coverage
ratio
|
||||||||||||||
|
For
fiscal quarters ending:
|
||||||||||||||
|
Funding
date through September 30, 2010
|
1.25:1.00
|
|||||||||||||
|
December
31, 2010 through each fiscal quarter thereafter
|
1.50:1.00
|
|||||||||||||
The
following describes Ashland’s June 2009 calculation of the fixed charge coverage
ratio per the senior credit agreement included in a Form 8-K filed on November
21, 2008:
|
(In
millions, except ratios) (a)
|
Q1'09
|
Q2'09
|
Q3'09
|
Q4'09
|
Total
|
Covenant
ratio
|
||||||||||||||||||
|
Fixed
charge coverage
|
||||||||||||||||||||||||
|
Consolidated
EBITDA
|
$ | 155 | $ | 227 | $ | 266 | $ | 304 | $ | 952 | ||||||||||||||
|
Capital
expenditures
|
57 | 42 | 27 | 67 | 193 | |||||||||||||||||||
|
Adjusted
interest expense
|
51 | 45 | 45 | 43 | 184 | |||||||||||||||||||
|
Scheduled
debt payments
|
- | 17 | 17 | 11 | 45 | |||||||||||||||||||
|
Adjusted
dividend payment
|
5 | 5 | 6 | 6 | 22 | |||||||||||||||||||
|
Fixed
charge coverage ratio
|
3.0 | x | 1.25 | x | ||||||||||||||||||||
|
min.
|
||||||||||||||||||||||||
|
(a)
|
All
numbers adjusted to reflect terminology and calculation methodology
governing the senior credit agreement, included in a Form 8-K filed on
November 21, 2008, as amended.
|
F-29
NOTE
I – DEBT (continued)
Under
Ashland’s financing facilities, the minimum consolidated net worth covenant at
the end of any fiscal quarter ending after December 31, 2008 must not be less
than 85% of Ashland’s consolidated net worth as of December 31, 2008, after
giving effect to any purchase accounting adjustments relating to the Hercules
acquisition subsequent to December 31, 2008, increased on a cumulative basis for
each subsequent quarter commencing with January 1, 2009 by an amount equal to
50% of Ashland’s U.S. GAAP reported net income (to the extent positive with no
deduction for net losses) plus 100% of net cash proceeds of any issuance of
equity interests (other than disqualified equity interests). As of
September 30, 2009, Ashland’s consolidated net worth covenant was $3,609 million
versus the minimum consolidated net worth covenant of $3,155 million, a
difference of $454 million. As outlined above, this difference could
be adversely impacted by any future operating losses, impairment (including
goodwill, intangible assets and property, plant and equipment), pension
remeasurement, severance or other related charges that reduce Ashland’s
consolidated net worth.
As part
of the financing arrangements to acquire Hercules, Ashland is now subject to the
following capital expenditure limits, which can be increased by any qualifying
carryover from prior years: $300 million in fiscal year 2009, $250
million in fiscal year 2010, $330 million in fiscal year 2011, $360 million in
fiscal year 2012, $370 million in fiscal year 2013 and $375 million in fiscal
year 2014. In accordance with the senior credit agreement, 50% of any
capital expenditure amount set forth above that is not expended in the fiscal
year for which it is permitted above may be carried over for expenditure in the
next following fiscal year. During 2009, Ashland’s total capital
expenditures per the senior credit agreement, totaled $193 million, which
was more than $100 million below the required covenant and $127 million below
the combined actual capital expenditures of $320 million for the twelve
months ended September 30, 2008 for both companies. In accordance
with the senior credit agreement, an additional $53 million will be added
to the $250 million minimum requirement for 2010 to arrive at the total capital
expenditure covenant. During 2009, Ashland recorded $174 million for
capital expenditures. Prior to Ashland’s acquisition of Hercules on
November 13, 2008, the Hercules businesses incurred capital expenditures of
$19 million from October 1 through November 13, 2008 which, in accordance
with the senior credit agreement, are included in the covenant calculation for
fiscal year 2009. Ashland is currently forecasting $200 million of
capital expenditures for fiscal 2010.
NOTE
J – OTHER NONCURRENT ASSETS AND LIABILITIES
The
following table provides the components of other noncurrent assets in the
Consolidated Balance Sheets as of September 30.
|
(In
millions)
|
2009
|
2008
|
||||||
|
Deferred
compensation investments
|
$ | 175 | $ | 127 | ||||
|
Debt
issuance cost
|
112 | - | ||||||
|
Equity
investments
|
79 | 81 | ||||||
|
Tax
receivables
|
42 | 49 | ||||||
|
Environmental
insurance receivables
|
35 | 40 | ||||||
|
Defined
benefit plan assets
|
32 | - | ||||||
|
Debt
defeasance assets
|
18 | 18 | ||||||
|
Note
receivables
|
14 | 20 | ||||||
|
Investments
of captive insurance companies
|
3 | 26 | ||||||
|
Other
|
86 | 27 | ||||||
| $ | 596 | $ | 388 | |||||
The
following table provides the components of other noncurrent liabilities in the
Consolidated Balance Sheets as of September 30.
|
(In
millions)
|
2009
|
2008
|
||||||
|
Environmental
remediation reserves
|
$ | 169 | $ | 112 | ||||
|
Accrued
tax liabilities (including sales and franchise)
|
145 | 81 | ||||||
|
Deferred
compensation
|
93 | 101 | ||||||
|
Insurance
reserves related to workers compensation and general
liability
|
86 | 82 | ||||||
|
Other
|
97 | 52 | ||||||
| $ | 590 | $ | 428 | |||||
F-30
NOTE
K – LEASES
Ashland
and its subsidiaries are lessees of office buildings, retail outlets,
transportation equipment, warehouses and storage facilities, and other
equipment, facilities and properties under leasing agreements that expire at
various dates. Capitalized lease obligations are not significant and
are included in long-term debt and capital lease assets are included in
property, plant and equipment. Future minimum rental payments at
September 30, 2009 were $67 million in 2010, $58 million in 2011,
$50 million in 2012, $41 million in 2013, $30 million in 2014 and
$59 million in 2015 and later years. Rental expense under
operating leases was as follows:
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Minimum
rentals (including rentals under short-term leases)
|
$ | 78 | $ | 59 | $ | 60 | ||||||
|
Contingent
rentals
|
3 | 3 | 3 | |||||||||
|
Sublease
rental income
|
(6 | ) | (1 | ) | (2 | ) | ||||||
| $ | 75 | $ | 61 | $ | 61 | |||||||
NOTE L – INCOME TAXES
A summary
of the provision (benefit) for income taxes related to continuing operations
follows.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 9 | $ | 13 | $ | 5 | ||||||
|
State
|
3 | 3 | (7 | ) | ||||||||
|
Foreign
|
68 | 26 | 38 | |||||||||
| 80 | 42 | 36 | ||||||||||
|
Deferred
|
- | 44 | 22 | |||||||||
|
Income
tax expense
|
$ | 80 | $ | 86 | $ | 58 | ||||||
Deferred
income taxes are provided for income and expense items recognized in different
years for tax and financial reporting purposes. Ashland has not
recorded deferred income taxes on the undistributed earnings of certain foreign
subsidiaries and foreign corporate joint ventures. As of September
30, 2009, management intends to indefinitely reinvest such earnings, which
amounted to $452 million. Because of significant foreign tax credits,
it is estimated that U.S. federal income taxes of approximately $63 million
would be incurred if those earnings were repatriated. Foreign net
operating loss carryforwards primarily relate to certain European operations and
generally may be carried forward. U.S. state net operating loss
carryforwards relate to operational losses within certain states and generally
may be carried forward. Temporary differences that give rise to
significant deferred tax assets and liabilities as of September 30
follow.
|
(In
millions)
|
2009
|
2008
|
||||||
|
Deferred
tax assets
|
||||||||
|
Employee
benefit obligations
|
$ | 431 | $ | 124 | ||||
|
Environmental,
self-insurance and litigation reserves (net of
receivables)
|
247 | 78 | ||||||
|
Credit
carryforwards (a)
|
152 | - | ||||||
|
Foreign
net operating loss carryforwards (b)
|
106 | 29 | ||||||
|
State
net operating loss carryforwards (c)
|
101 | - | ||||||
|
Federal
capital loss carryforwards (d)
|
73 | - | ||||||
|
Compensation
accruals
|
79 | 75 | ||||||
|
Uncollectible
accounts receivable
|
12 | 9 | ||||||
|
Other
items
|
80 | 56 | ||||||
|
Valuation
allowances (e)
|
(306 | ) | (26 | ) | ||||
|
Total
deferred tax assets
|
975 | 345 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Property,
plant and equipment
|
295 | 75 | ||||||
|
Goodwill
and other intangibles (f)
|
277 | 10 | ||||||
|
Investment
in unconsolidated affiliates
|
127 | 10 | ||||||
|
Total
deferred tax liabilities
|
699 | 95 | ||||||
|
Net
deferred tax asset
|
$ | 276 | $ | 250 | ||||
F-31
NOTE L – INCOME TAXES
(continued)
|
(a)
|
Consists
of foreign tax credits of $134 million expiring over 2012 to 2018,
alternative minimum tax credits of $11 million with no expiration and
research and development credits of $7 million expiring over 2022 to
2029.
|
|
(b)
|
Foreign
net operating loss carryforwards will expire in future years as follows:
$1 million in 2010, $1 million in 2011 and the remaining balance in other
future years.
|
|
(c)
|
State
net operating loss carryforwards will expire in future years as
follows: $42 million in 2010, $30 million in 2011 and the
remaining balance in other future
years.
|
|
(d)
|
Federal
capital loss carryforwards will expire in
2014.
|
|
(e)
|
Valuation
allowances primarily relate to the realization of recorded tax benefits on
U.S. federal, state and foreign net operating loss carryforwards as well
as capital losses.
|
|
(f)
|
The
total amount of goodwill as of September 30, 2009 expected to be
deductible for tax purposes is $110
million.
|
Ashland’s
income tax expense for 2009, 2008 and 2007 included $29 million of tax expense,
$9 million of tax benefit and $9 million of tax expense, respectively, due to
the resolution of domestic and foreign tax matters and the reevaluation of
income tax reserves related to tax positions taken in prior
years. During 2007, Ashland recorded a $15 million tax benefit
related to dividends held within the employee stock ownership plan, primarily
due to the special dividend of $10.20 paid on October 25, 2006 as part of the
distribution to shareholders of a substantial portion of the APAC divestiture
proceeds. For further information on this special dividend, see Note
M.
The U.S.
and foreign components of income from continuing operations before income taxes
and a reconciliation of the statutory federal income tax with the provision for
income taxes follow. The foreign components of income from continuing
operations disclosed below exclude any allocations of certain corporate expenses
incurred in the U.S.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
||||||||||||
|
United
States
|
$ | 30 | $ | 174 | $ | 163 | ||||||
|
Foreign
|
128 | 87 | 96 | |||||||||
| $ | 158 | $ | 261 | $ | 259 | |||||||
|
Income
taxes computed at U.S. statutory rate (35%)
|
$ | 55 | $ | 91 | $ | 91 | ||||||
|
Increase
(decrease) in amount computed resulting from
|
||||||||||||
|
Resolution
and reevaluation of tax positions
|
29 | (9 | ) | 9 | ||||||||
|
Auction
rate securities valuation allowance
|
8 | - | - | |||||||||
|
Life
insurance loss (income)
|
2 | 9 | (7 | ) | ||||||||
|
Claim
for research and development credits
|
(9 | ) | (1 | ) | (3 | ) | ||||||
|
(Gain)
loss on divestitures
|
(4 | ) | (7 | ) | 1 | |||||||
|
Net
impact of foreign results
|
(2 | ) | 5 | (2 | ) | |||||||
|
Deductible
dividends under employee stock ownership plan
|
- | (1 | ) | (15 | ) | |||||||
|
Other
items
|
1 | (1 | ) | (16 | ) | |||||||
|
Income
tax expense
|
$ | 80 | $ | 86 | $ | 58 | ||||||
U.S. GAAP
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 amount of benefit that
has a greater than 50-percent likelihood of being realized. Ashland
had $125 million and $79 million of unrecognized tax benefits, of which $48
million and $47 million relates to discontinued operations, at September 30,
2009 and 2008, respectively. As of September 30, 2009, the total
amount of unrecognized tax benefits that, if recognized, would affect the tax
rate for continuing and discontinued operations was $93 million. 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 includes the
full amount of unrecognized tax benefits in other noncurrent liabilities in the
Consolidated Balance Sheets.
Ashland
recognizes interest and penalties related to uncertain tax positions as a
component of income tax expense in the Statements of Consolidated Income and
such interest and penalties totaled $12 million and $3 million in 2009 and 2008,
respectively. Ashland had $38 million and $15 million in interest and
penalties related to unrecognized tax benefits accrued as of September 30, 2009
and 2008, respectively.
F-32
During
the twelve month period ended September 30, 2009, changes in unrecognized tax
benefits were as follows.
|
(In
millions)
|
||||
|
Balance
at October 1, 2008
|
$ | 79 | ||
|
Increases
related to positions taken on items from prior years
|
21 | |||
|
Decreases
related to positions taken on items from prior years
|
(7 | ) | ||
|
Increases
related to assumed Hercules positions in the current year
|
35 | |||
|
Increases
related to positions taken in the current year
|
29 | |||
|
Lapse
of statute of limitations
|
(9 | ) | ||
|
Settlement
of uncertain tax positions with tax authorities
|
(23 | ) | ||
|
Balance
at September 30, 2009
|
$ | 125 | ||
It is
reasonably possible that the amount of unrecognized tax benefits may increase or
decrease within the next twelve months as the result of settlement of ongoing
audits, which may have a material affect on the Consolidated Financial
Statements.
Ashland
or one of it 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,
Switzerland 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.
MAP
Transaction tax matters
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
previously referred to TMA, Marathon was responsible for this payment and paid
Ashland $11 million. 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 TMA, Ashland has agreed to indemnify Marathon for any obligations
which arise from those positions. Adjustments made to these
liabilities are recorded as a component of selling, general and administrative
expenses within the Statements of Consolidated Income. Ashland
recorded $2 million of income relating to these items during 2008.
NOTE
M – CAPITAL STOCK
On
November 13, 2008, Ashland completed its acquisition of Hercules. As
part of the consideration to acquire the 112.7 million shares of outstanding
Hercules Common Stock on that date, Ashland issued 10.5 million shares of
Ashland Common Stock valued, as of the announcement date, at
$450 million. See Note B for more information on the Hercules
acquisition.
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 Ashland
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. This amount was accrued as dividends payable in the
Consolidated Balance Sheet at September 30, 2006 and was subsequently paid
during 2007. Substantially all of the remaining proceeds were used to
repurchase Ashland Common Stock and on September 14, 2006, Ashland’s Board of
Directors also authorized the purchase of up to 7 million shares.
Ashland
did not repurchase any shares during 2009 and 2008, but did repurchase 4.7
million shares for $288 million during 2007 pursuant to the repurchase program
previously discussed. The stock repurchase actions were consistent
with certain representations of intent made to the Internal Revenue Service with
respect to the transfer of MAP.
At
September 30, 2009, 9.8 million common shares are reserved for issuance
under stock incentive and deferred compensation plans.
F-33
NOTE
N – STOCK INCENTIVE PLANS
Ashland
has stock incentive plans under which key employees or directors are granted
SARs, performance share awards 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
recognizes compensation expense for the grant date fair value of stock-based
awards over the applicable vesting period. The components of
Ashland’s pretax stock-based awards (net of forfeitures), which is included in
the selling, general and administrative expense caption of the Statements of
Consolidated Income, and associated income tax benefits are as
follows:
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
SARs
|
$ | 4 | $ | 7 | $ | 7 | ||||||
|
Performance
share awards
|
2 | 3 | 6 | |||||||||
|
Nonvested
stock awards
|
2 | 2 | 3 | |||||||||
| $ | 8 | $ | 12 | $ | 16 | |||||||
|
Income
tax benefit
|
$ | 3 | $ | 5 | $ | 6 | ||||||
Stock
Appreciation Rights (SARs)
SARs are
granted to employees or directors at a price equal to the fair market value of
the stock on the date of grant and typically become exercisable over periods of
one to three years. Unexercised SARs lapse ten years after the date
of grant. Ashland estimates the fair value of 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. The following table illustrates the weighted-average of
key assumptions used within the Black-Scholes option-pricing
model. The risk free interest rate assumption was based on the U.S.
Treasury yield curve in effect at the time of the grant for the expected term of
the instrument. The dividend yield reflects the assumption that the
current dividend payout will continue with no anticipated
increases. The volatility assumption was calculated by utilizing an
unbiased standard deviation of Ashland’s common stock closing price for the past
five years. The expected life is based on historical data and is not
necessarily indicative of exercise patterns that may occur.
|
(In
millions except per share data)
|
2009
|
2008 |
2007
|
|||||||||
|
Weighted-average
fair value per share of SARs granted
|
$ | 2.90 | $ | 12.62 | $ | 17.67 | ||||||
|
Assumptions
(weighted-average)
|
||||||||||||
|
Risk-free
interest rate
|
2.1 | % | 3.8 | % | 4.2 | % | ||||||
|
Expected
dividend yield
|
2.9 | % | 2.1 | % | 1.7 | % | ||||||
|
Expected
volatility
|
38.5 | % | 25.8 | % | 27.3 | % | ||||||
|
Expected
life (in years)
|
5.0 | 5.0 | 5.0 | |||||||||
A
progression of activity and various other information relative to SARs and
previously issued and vested stock options is presented in the following
table.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
(In
thousands except per share data)
|
Number
of
common
shares
|
Weighted-
average
exercise
price
per
share
|
Number
of
common
shares
|
Weighted-
average
exercise
price
per
share
|
Number
of
common
shares
|
Weighted-
average
exercise
price
per
share
|
||||||||||||||||||
|
Outstanding
- beginning of year (a)
|
2,888 | $ | 43.92 | 2,674 | $ | 36.07 | 2,602 | $ | 41.56 | |||||||||||||||
|
Granted
|
1,350 | 10.49 | 434 | 53.33 | 482 | 65.78 | ||||||||||||||||||
|
Exercised
|
(405 | ) | 22.56 | (173 | ) | 35.37 | (829 | ) | 31.15 | |||||||||||||||
|
Converted
Hercules options (b)
|
939 | 31.54 | - | - | - | - | ||||||||||||||||||
|
Forfeitures
and expirations (b)
|
(869 | ) | 37.13 | (47 | ) | 52.51 | (36 | ) | 53.63 | |||||||||||||||
|
Special
dividend adjustment (c)
|
- | - | - | - | 455 | - | ||||||||||||||||||
|
Outstanding
- end of year (a)
|
3,903 | 33.10 |
(b)
|
2,888 | 43.92 |
(b)
|
2,674 | 41.99 |
(b)
|
|||||||||||||||
|
Exercisable
- end of year
|
2,294 | 42.67 | 2,234 | 39.91 | 2,064 | 36.07 | ||||||||||||||||||
F-34
|
(a)
|
Exercise
prices per share for SARs and options outstanding at September 30, 2009
ranged from $9.49 to $19.81 for 1,537,000 shares, $21.43 to $25.71 for
278,000 shares, from $32.28 to $38.47 for 587,000 shares, from $42.58 to
$49.79 for 654,000 shares, and from $53.33 to $65.78 for 847,000
shares. The weighted-average remaining contractual life of
outstanding SARs and stock options was 8.1 years and exercisable SARs and
stock options was 6.3 years.
|
|
(b)
|
As
part of the Hercules acquisition, Ashland converted certain Hercules
options into Ashland options at equivalent exercise stock price values, of
which a significant amount expired during
2009.
|
|
(c)
|
As
described in Note M, Ashland distributed a special $10.20 dividend to each
shareholder of record as of October 10, 2006. Adjustments were
made to outstanding grants of SARs and stock options to maintain their
intrinsic values. The number of shares was increased by a
factor of 1.18 and the exercise prices were decreased by a factor of
.85. These adjustments did not result in an increase in the
fair value of outstanding grants or any adjustment to expense
recognition.
|
The total
intrinsic value of SARs and stock options exercised was $5 million in 2009, $5
million in 2008 and $28 million in 2007. The actual tax benefit
realized from the exercised SARs and stock options was $2 million in 2009,
$2 million in 2008 and $12 million in 2007. The total grant date
fair value of SARs and stock options that vested during 2009, 2008 and 2007 was
$5 million, $7 million and $2 million, respectively. As of September
30, 2009, there was $4 million of total unrecognized compensation costs
related to SARs. That cost is expected to be recognized over a
weighted-average period of 1.7 years. As of September 30, 2009, the
aggregate intrinsic value of outstanding SARs and stock options was $57 million
and exercisable SARs and stock options was $15 million.
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 thereon.
A
progression of activity and various other information relative to nonvested
stock awards is presented in the following table.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
(In
thousands except per share data)
|
Number
of
common
shares
|
Weighted-
average
grant
date
fair
value
|
Number
of
common
shares
|
Weighted-
average
grant
date
fair
value
|
Number
of
common
shares
|
Weighted-
average
grant
date
fair
value
|
||||||||||||||||||
|
Nonvested
- beginning of year
|
300 | $ | 40.86 | 424 | $ | 40.28 | 453 | $ | 39.19 | |||||||||||||||
|
Granted
|
191 | 13.08 | 18 | 56.74 | 32 | 63.99 | ||||||||||||||||||
|
Vested
|
(227 | ) | 32.48 | (136 | ) | 39.34 | (56 | ) | 43.70 | |||||||||||||||
|
Forfeitures
|
(10 | ) | 62.06 | (6 | ) | 59.62 | (5 | ) | 55.71 | |||||||||||||||
|
Nonvested
- end of year
|
254 | 26.59 | 300 | 40.86 | 424 | 40.28 | ||||||||||||||||||
The total
fair value of nonvested stock awards that vested during 2009, 2008 and 2007 was
$7 million, $7 million and $3 million, respectively. As of
September 30, 2009, 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.
Performance
shares
Ashland
sponsors a long-term incentive plan that awards performance shares/units to
certain key employees that are tied to Ashland’s overall financial performance
relative to the financial performance of a selected industry peer
group. Ashland believes that the focus on relative performance
encourages management to make decisions that create shareholder
value. Awards are granted annually, with each award covering a
three-year performance cycle. Historically, each performance
share/unit is convertible to one share of Ashland Common Stock or
cash. As a result, these plans were recorded as a liability in the
Consolidated Balance Sheets within the other noncurrent liabilities
caption. As of September 30, 2008 the recorded liability for these
plans was $2 million. Effective with the 2007-2009 grant, all
performance shares granted are payable only in Ashland Common
Stock. Performance measures used to determine the actual number of
performance shares issuable upon vesting include an equal weighting of Ashland’s
total shareholder return (TSR) performance and Ashland’s return on investment
(ROI) performance as compared to the performance peer group over the three-year
performance cycle. TSR relative to peers is considered a market
condition while ROI is considered a performance condition under applicable U.S.
GAAP. Nonvested performance shares/units do not entitle employees to
vote the shares or to receive any dividends thereon.
F-35
NOTE
N – STOCK INCENTIVE PLANS (continued)
The
following table shows the performance shares/units granted for all plans that
award Ashland Common Stock.
|
(In
thousands)
|
Performance
period
|
Target
shares
granted
|
(a) |
Weighted-
average
fair
value
per
share
|
||||||
|
Fiscal
Year 2009
|
October
1, 2008 - September 30, 2011
|
286 | $ | 7.99 | ||||||
|
Fiscal
Year 2008
|
October
1, 2007 - September 30, 2010
|
118 | $ | 50.55 | ||||||
|
Fiscal
Year 2007
|
October
1, 2006 - September 30, 2009
|
142 | $ | 72.52 | ||||||
|
(a)
|
At
the end of the performance period, the actual number of shares issued can
range from zero to 200 percent of the target shares
granted.
|
The fair
value of the ROI portion of the performance share awards is equal to the fair
market value of Ashland’s Common Stock on the date of the grant discounted for
the dividends forgone during the vesting period of the three-year performance
cycle. Compensation cost is recognized over the requisite service
period if it is probable that the performance condition will be
satisfied. The fair value of the TSR portion of the performance share
awards is calculated using a Monte Carlo simulation valuation model using key
assumptions included in the following table. Compensation cost is
recognized over the requisite service period regardless of whether the market
condition is satisfied.
|
|
2009
|
2008
|
2007
|
|||||||
|
Risk-free
interest rate
|
0.9%
- 1.2
|
% |
3.5%
- 3.7
|
% |
4.7%
- 5.0
|
% | ||||
|
Expected
dividend yield
|
2.2 |
%
|
1.7 |
%
|
1.8 |
%
|
||||
|
Expected
life (in years)
|
3.0
|
3.0
|
3.0
|
|||||||
|
Expected
volatility
|
43.6 |
%
|
26.3 |
%
|
24.4 |
%
|
||||
The
performance share awards expense for all plans that award Ashland Common Stock
during 2009, 2008 and 2007 was $2 million $4 million and $2 million,
respectively. The following table shows changes in nonvested
performance shares/units for all plans that award Ashland Common
Stock.
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
(In
thousands except per share data)
|
Shares
|
Weighted-
average
grant
date
fair
value
|
Shares
|
Weighted-
average
grant
date
fair
value
|
Shares
|
Weighted-
average
grant
date
fair
value
|
||||||||||||||||||
|
Nonvested
- beginning of year
|
227 | $ | 61.87 | 119 | $ | 72.52 | - | $ | - | |||||||||||||||
|
Granted
|
286 | 7.99 | 118 | 50.55 | 142 | 72.52 | ||||||||||||||||||
|
Forfeitures
|
(21 | ) | 29.62 | (10 | ) | 54.94 | (23 | ) | 72.52 | |||||||||||||||
|
Nonvested
- end of year
|
492 | 31.77 | 227 | 61.87 | 119 | 72.52 | ||||||||||||||||||
As of
September 30, 2009, there was $3 million of total unrecognized compensation
costs related to nonvested performance share awards. That cost is
expected to be recognized over a weighted-average period of approximately 1.5
years.
NOTE
O – EMPLOYEE BENEFIT PLANS
Pension
plans
Ashland
and its subsidiaries sponsor contributory and noncontributory qualified defined
benefit pension plans that cover a majority of employees in the United States
and in a number of other countries. In addition, Ashland has
non-qualified unfunded pension plans which provide supplemental defined benefits
to those employees whose benefits under the qualified pension plans are limited
by the Employee Retirement Income Security Act of 1974 and the Internal Revenue
Code. Ashland funds the costs of the non-qualified plans as the
benefits are paid. Pension obligations for employees of non-U.S.
consolidated subsidiaries are provided for by depositing funds with trustees or
by book reserves in accordance with local practices and regulations of the
respective countries.
In
November 2008, in conjunction with the purchase of Hercules, Ashland assumed
$207 million of net liabilities associated with qualified and non-qualified
defined benefit pension plans, which had a projected benefit obligation
of
F-36
$1,521 million. Effective
September 30, 2009, Ashland’s U.S. qualified plan was merged into the Hercules
U.S. qualified plan and renamed the Ashland Hercules Pension
Plan. The plan assumed all assets and liabilities of the former
Ashland Plan; however, until further amended, the benefits of the applicable
employees under the Ashland Plan and Hercules Plan will remain unchanged from
those in place prior to the merger of the plans.
Prior to
January 1, 2005, benefits under the assumed Hercules U.S. pension plans
generally were based on employees’ years of service and compensation at the
point of retirement. On this date the plan was closed for new
participants and the calculation formula was adjusted for the remaining
participants from “final pay” to “modified career average pay.”
Prior to
July 1, 2003, benefits under Ashland’s legacy U.S. pension plans generally
were based on employees’ years of service and compensation during the years
immediately preceding their retirement. Although certain changes were
implemented on that date, the pension benefits of employees with at least ten
years of service were not affected. As of July 1, 2003, the
pension benefits of affected employees were converted to cash balance
accounts. Such employees received an initial account balance equal to
the present value of their accrued benefits under the previous plan on that
date. Pension benefits for these employees are based on the balances
in their accounts upon retirement.
Other
postretirement benefit plans
Ashland
and its subsidiaries sponsor health care and life insurance plans for eligible
employees in the U.S. and Canada who retire or are
disabled. Ashland’s retiree life insurance plans are noncontributory,
while Ashland shares the costs of providing health care coverage with its
retired employees through premiums, deductibles and coinsurance
provisions. Ashland funds its share of the costs of the
postretirement benefit plans as the benefits are paid.
In
November 2008, in conjunction with the purchase of Hercules, Ashland assumed
$109 million of liabilities associated with postretirement plans. The
assumed postretirement health care plans include a limit on Ashland’s share of
costs for recent and future retirees. The assumed pre-65 health care
cost trend rate as of September 30, 2009 was an initial rate of 8% in 2009
reducing to 5% in 2012 and thereafter. The assumed post-65 health
care cost trend rate as of September 30, 2009 was an initial rate of 12% in 2009
reducing to 5% in 2016 and thereafter. The assumptions used to
project the liability anticipate future cost-sharing changes to the written
plans that are consistent with the increase in health care cost. U.S.
employees from Hercules hired after December 31, 2002 are ineligible for retiree
life insurance or postretirement health care benefits.
On
July 1, 2003, Ashland implemented changes in the way it shares the cost of
health care coverage with future retirees in its legacy plan. These
changes did not affect the previous cost-sharing program for retirees or for
employees meeting certain qualifications at that date. However,
Ashland did amend that program to limit its annual per capita costs to an amount
equivalent to base year per capita costs, plus annual increases of up to 1.5%
per year for costs incurred after January 1, 2004. Under a
previous amendment, base year costs were limited to the amounts incurred in
1992, plus annual increases of up to 4.5% per year thereafter. As a
result, health care cost trend rates have no significant effect on the amounts
reported for the health care plans. Premiums for retiree health care
coverage are equivalent to the excess of the estimated per capita costs over the
amounts borne by Ashland.
Employees
who were employed on June 30, 2003 who did not meet the required
qualifications were allocated notional accounts that can only be used to pay all
or part of the premiums for retiree health care coverage. Such
premiums represent the full costs of providing that coverage, without any
subsidy from Ashland. Employees must meet certain requirements upon
separation in order to have access to their notional
accounts. Retirees will continue to have access to Ashland coverage
after their notional accounts are exhausted, but they will be responsible for
paying the full premiums. New hires after June 30, 2003 will
have access to any retiree health care coverage that may be provided, but will
have no Ashland company funds available to help pay for such
coverage.
Obligations
and funded status
Actuarial
valuations are performed for the pension and other postretirement benefit plans
to determine Ashland’s obligation for each plan. In accordance with
U.S. GAAP, Ashland recognizes the unfunded status of the plans as a liability in
the Consolidated Balance Sheets. Summaries of the change in benefit
obligations, plan assets, funded status of the plans, amounts recognized in the
balance sheet, and assumptions used to determine the benefit obligations for
2009 and 2008 follow.
F-37
NOTE
O – EMPLOYEE BENEFIT PLANS (continued)
|
Other
postretirement
|
||||||||||||||||
|
Pension
plans
|
benefit
plans
|
|||||||||||||||
|
(In
millions)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Change
in benefit obligations
|
||||||||||||||||
|
Benefit
obligations at October 1
|
$ | 1,343 | $ | 1,562 | $ | 180 | $ | 205 | ||||||||
|
Assumed
obligations from Hercules
|
1,521 | - | 109 | - | ||||||||||||
|
Service
cost
|
38 | 36 | 5 | 5 | ||||||||||||
|
Interest
cost
|
204 | 93 | 20 | 12 | ||||||||||||
|
Participant
contributions
|
2 | 2 | 16 | 11 | ||||||||||||
|
Benefits
paid
|
(198 | ) | (80 | ) | (47 | ) | (31 | ) | ||||||||
|
Medicare
Part D Act
|
- | - | 2 | 2 | ||||||||||||
|
Actuarial
loss (gain)
|
675 | (267 | ) | 59 | (24 | ) | ||||||||||
|
Foreign
currency exchange rate changes
|
13 | (8 | ) | - | - | |||||||||||
|
Other
|
(5 | ) | 5 | - | - | |||||||||||
|
Benefit
obligations at September 30
|
$ | 3,593 | $ | 1,343 | $ | 344 | $ | 180 | ||||||||
|
Change
in plan assets
|
||||||||||||||||
|
Value
of plan assets at October 1
|
$ | 1,187 | $ | 1,505 | $ | - | $ | - | ||||||||
|
Assumed
plan assets from Hercules
|
1,318 | - | - | - | ||||||||||||
|
Actual
(loss) return on plan assets
|
381 | (261 | ) | - | - | |||||||||||
|
Employer
contributions
|
47 | 25 | 31 | 20 | ||||||||||||
|
Participant
contributions
|
2 | 2 | 16 | 11 | ||||||||||||
|
Benefits
paid
|
(198 | ) | (80 | ) | (47 | ) | (31 | ) | ||||||||
|
Foreign
currency exchange rate changes
|
13 | (7 | ) | - | - | |||||||||||
|
Other
|
(5 | ) | 3 | - | - | |||||||||||
|
Value
of plan assets at September 30
|
$ | 2,745 | $ | 1,187 | $ | - | $ | - | ||||||||
|
Unfunded
status of the plans
|
$ | (848 | ) | $ | (156 | ) | $ | (344 | ) | $ | (180 | ) | ||||
|
Amounts
recognized in the balance sheet
|
||||||||||||||||
|
Noncurrent
benefit assets
|
$ | 32 | $ | - | $ | - | $ | - | ||||||||
|
Current
benefit liabilities
|
(11 | ) | (6 | ) | (29 | ) | (14 | ) | ||||||||
|
Noncurrent
benefit liabilities
|
(869 | ) | (150 | ) | (315 | ) | (166 | ) | ||||||||
|
Net
amount recognized
|
$ | (848 | ) | $ | (156 | ) | $ | (344 | ) | $ | (180 | ) | ||||
|
Weighted-average
plan assumptions
|
||||||||||||||||
|
Discount
rate
|
5.82 | % | 7.81 | % | 5.50 | % | 7.78 | % | ||||||||
|
Rate
of compensation increase
|
3.67 | % | 3.73 | % | - | - | ||||||||||
At
September 30, 2009 and 2008, the amounts recognized in accumulated other
comprehensive income, regulatory assets and regulatory liabilities, before
income tax benefits, are shown in the following table.
|
|
Pension
|
Postretirement
|
||||||||||||||
|
(In
millions)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Net
actuarial loss (gain)
|
$ | 715 | $ | 258 | $ | - | $ | (66 | ) | |||||||
|
Prior
service cost (credit)
|
5 | 5 | (20 | ) | (23 | ) | ||||||||||
|
Benefit
obligations at September 30
|
$ | 720 | $ | 263 | $ | (20 | ) | $ | (89 | ) | ||||||
The
accumulated benefit obligation for all pension plans was $3,428 million at
September 30, 2009 and $1,245 million at September 30,
2008. Information for pension plans with an accumulated benefit
obligation in excess of plan assets follows:
|
2009
|
2008
|
|||||||||||||||||||||||
|
Non-
|
Non-
|
|||||||||||||||||||||||
|
Qualified
|
qualified
|
Qualified
|
qualified
|
|||||||||||||||||||||
|
(In
millions)
|
plans
(a)
|
plans
|
Total
|
plans
(a)
|
plans
|
Total
|
||||||||||||||||||
|
Projected
benefit obligation
|
$ | 3,137 | $ | 144 | $ | 3,281 | $ | 44 | $ | 75 | $ | 119 | ||||||||||||
|
Accumulated
benefit obligation
|
3,008 | 134 | 3,142 | 41 | 67 | 108 | ||||||||||||||||||
|
Fair
value of plan assets
|
2,403 | - | 2,403 | 15 | - | 15 | ||||||||||||||||||
|
(a)
|
Includes
qualified U.S. and non-U.S. pension
plans.
|
F-38
Plan
assets
The
expected long-term rate of return on U.S. pension plan assets for 2009 was
8.25%. The basis for determining the expected long-term rate of
return is a combination of future return assumptions for various asset classes
in Ashland’s investment portfolio, historical analysis of previous returns,
market indices and a projection of inflation.
Ashland’s
U.S. pension plan assets are managed by outside investment managers, which are
monitored monthly against investment return benchmarks and Ashland’s established
investment strategy. Ashland’s investment strategy is designed to
promote diversification, to moderate volatility and to balance the expected
long-term rate of return with an acceptable risk level. Investment
managers are selected based on an analysis of, among other things, their
investment process, historical investment results, frequency of management
turnover, cost structure and assets under management. Assets are
periodically reallocated between investment managers to maintain an appropriate
asset mix, diversification of investments and to optimize returns.
Ashland’s
historical investment strategy has been to strive for an asset mix that is
allocated approximately 30% to long-term fixed income and 70% to instruments
believed to provide growth rates greater than liabilities. During the
beginning of 2009, Ashland shifted the investment strategy towards a greater
allocation of fixed income securities to capitalize on the high rates of return
available at that time. Since then, rates of return for these
instruments have decreased substantially, allowing the plan to realize
appropriate risk-adjusted returns. In November 2009, Ashland began
the process of reallocating out of fixed income to other investments that
historically have had greater returns than those currently available in
long-term fixed income instruments.
Ashland’s
investment strategy and management practices relative to plan assets of non-U.S.
plans generally are consistent with those for U.S. plans, except in those
countries where investment of plan assets is dictated by applicable
regulations. The weighted-average asset allocations for Ashland’s
U.S. and non-U.S. plans at September 30, 2009 and 2008 by asset category
follow.
| Actual at September 30 | ||||||||||
|
(In
millions)
|
Target
|
2009
|
2008 |
|
||||||
|
Plan
assets allocation
|
||||||||||
|
Equity
securities
|
55 - 75 |
%
|
11 | % | 55 |
%
|
||||
|
Debt
securities
|
25 - 35 |
%
|
75 | % | 29 |
%
|
||||
|
Other
|
5 - 15 |
%
|
14 | % | 16 |
%
|
||||
| 100 | 100 |
%
|
||||||||
Components
of net periodic benefit costs
The plan
amendments in 2003 previously discussed under other postretirement benefit plans
reduced Ashland’s accrued obligations under those plans, and the reductions are
being amortized to income over future periods. Such amortization
reduced Ashland’s net periodic benefit costs for other postretirement benefits
by $4 million in 2009, $4 million in 2008 and $4 million in
2007. At September 30, 2009, the remaining unrecognized prior
service credit resulting from the changes amounted to $21 million, and will
reduce future costs by approximately $4 million annually through
2014.
The
following table summarizes the components of pension and other postretirement
benefit costs, and the assumptions used to determine net periodic benefit costs
for the plans.
|
Pension
benefits
|
Other
postretirement benefits
|
|||||||||||||||||||||||
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
|
Net
periodic benefit costs
|
||||||||||||||||||||||||
|
Service
cost
|
$ | 38 | $ | 36 | $ | 37 | $ | 5 | $ | 5 | $ | 4 | ||||||||||||
|
Interest
cost
|
204 | 93 | 87 | 20 | 12 | 11 | ||||||||||||||||||
|
Curtailment
|
- | - | - | - | - | 3 | ||||||||||||||||||
|
Special
termination benefits
|
- | - | 8 | - | - | - | ||||||||||||||||||
|
Expected
return on plan assets
|
(180 | ) | (113 | ) | (102 | ) | - | - | - | |||||||||||||||
|
Amortization
of prior service cost (credit)
|
- | - | - | (3 | ) | (3 | ) | 7 | ||||||||||||||||
|
Amortization
of net actuarial loss (gain)
|
15 | 5 | 17 | (5 | ) | (3 | ) | (3 | ) | |||||||||||||||
| $ | 77 | $ | 21 | $ | 47 | $ | 17 | $ | 11 | $ | 22 | |||||||||||||
|
Weighted-average plan
assumptions (a)
|
||||||||||||||||||||||||
|
Discount
rate
|
7.81 | % | 6.16 | % | 5.66 | % | 7.78 | % | 5.96 | % | 5.64 | % | ||||||||||||
| Rate of compensation increase | 3.73 | % | 3.74 | % | 3.74 | % | - | - | - | |||||||||||||||
|
Expected
long-term rate of
|
||||||||||||||||||||||||
| return on plan assets | 7.97 | % | 7.62 | % | 7.58 | % | - | - | - | |||||||||||||||
F-39
NOTE
O – EMPLOYEE BENEFIT PLANS (continued)
|
(a)
|
The
plan assumptions disclosed are a blended weighted-average rate for
Ashland’s U.S. and non-U.S. plans. The U.S. pension plan
represented approximately 86% of the projected benefit obligation at
September 30, 2009. Other postretirement benefit plans consist
of U.S. and Canada, with the U.S. plan representing approximately 95% of
the accumulated postretirement benefit obligation at September 30,
2009. Non-U.S. plans use assumptions generally consistent with
those of U.S. plans.
|
The
following table shows other changes in plan assets and benefit obligations
recognized in accumulated other comprehensive income.
|
|
Pension
|
Postretirement
|
||||||||||||||
|
(In
millions)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Net
actuarial (gain) loss
|
$ | 472 | $ | 104 | $ | 61 | $ | (24 | ) | |||||||
|
Prior
service cost
|
- | 3 | - | - | ||||||||||||
|
Reversal
of amortization item:
|
||||||||||||||||
|
Net
actuarial gain (loss)
|
(15 | ) | (5 | ) | 5 | 3 | ||||||||||
|
Prior
service credit
|
- | - | 3 | 3 | ||||||||||||
|
Total
|
$ | 457 | $ | 102 | $ | 69 | $ | (18 | ) | |||||||
|
Total
recognized in net periodic benefit cost
|
||||||||||||||||
|
and
accumulated other comprehensive income
|
$ | 534 | $ | 123 | $ | 86 | $ | (7 | ) | |||||||
The
following table shows the amounts in accumulated other comprehensive income at
September 30, 2009 that are expected to be recognized as components of net
periodic benefit cost (income) during the next fiscal year.
|
Other
|
||||||||
|
Pension
|
postretirement
|
|||||||
|
(In
millions)
|
benefits
|
benefits
|
||||||
|
Net
actuarial loss (gain)
|
$ | 46 | $ | (1 | ) | |||
|
Prior
service cost (credit)
|
1 | (3 | ) | |||||
|
Total
|
$ | 47 | $ | (4 | ) | |||
Cash
flows
In fiscal
2010, Ashland expects to contribute $31 million to its non-U.S. pension plans
and $110 million to its U.S. pension plans, $10 million in cash and $100 million
in Ashland Common Stock. The Ashland Common Stock contribution was
made in November 2009. The Pension Protection Act of 2006, enacted in
August 2006, introduced new minimum funding requirements that became effective
for Ashland during fiscal 2009. As a result, Ashland’s required
contributions to its non-U.S. and U.S. pension plans may vary in the
future.
The
following benefit payments, which reflect future service expectations, are
projected to be paid in each of the next five years and in aggregate for five
years thereafter.
|
Other
postretirement benefits
|
||||||||||||
|
Pension
|
With
Medicare
|
Without
Medicare
|
||||||||||
|
(In
millions)
|
benefits
|
Part
D subsidy
|
Part
D subsidy
|
|||||||||
|
2010
|
$ | 199 | $ | 29 | $ | 33 | ||||||
|
2011
|
205 | 30 | 34 | |||||||||
|
2012
|
212 | 29 | 34 | |||||||||
|
2013
|
220 | 29 | 34 | |||||||||
|
2014
|
226 | 29 | 34 | |||||||||
|
2015-2019
|
1,268 | 138 | 168 | |||||||||
Other
plans
Ashland
sponsors qualified savings plans to assist eligible employees in providing for
retirement or other future needs. Under such plans, company
contributions amounted to $19 million in 2009, $17 million in 2008 and $18
million in 2007. Ashland also sponsors various other benefit plans,
some of which are required by different countries. The assumed
liability of these plans from the Hercules acquisition totaled $4
million. The total noncurrent liabilities associated with these plans
were $30 million and $28 million as of September 30, 2009 and 2008,
respectively.
F-40
NOTE
P – LITIGATION, CLAIMS AND CONTINGENCIES
Asbestos
litigation
Ashland
and Hercules, a wholly owned subsidiary of Ashland, have liabilities from claims
alleging personal injury caused by exposure to asbestos. To assist in
developing and annually updating independent reserve estimates for future
asbestos claims and related costs given various assumptions, Ashland retained
Hamilton, Rabinovitz & Associates, Inc. (HR&A). The
methodology used by HR&A to project future asbestos costs is based largely
on recent experience, including claim-filing and settlement rates, disease mix,
enacted legislation, open claims, and litigation defense. The claim
experience of Ashland and Hercules are separately compared to the results of
previously conducted third party epidemiological studies estimating the number
of people likely to develop asbestos-related diseases. Those studies
were undertaken in connection with national analyses of 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.
Ashland
asbestos-related litigation
The
claims alleging personal injury caused by exposure to asbestos asserted against
Ashland result primarily from indemnification obligations undertaken in 1990 in
connection with the sale of Riley, a former subsidiary.
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. A summary of Ashland asbestos claims activity, excluding
Hercules claims, follows.
|
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Open
claims - beginning of year
|
115 | 134 | 162 | |||||||||
|
New
claims filed
|
2 | 4 | 4 | |||||||||
|
Claims
settled
|
(1 | ) | (2 | ) | (2 | ) | ||||||
|
Claims
dismissed
|
(16 | ) | (21 | ) | (30 | ) | ||||||
|
Open
claims - end of year
|
100 | 115 | 134 | |||||||||
A
progression of activity in the asbestos reserve is presented in the following
table.
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Asbestos
reserve - beginning of period
|
$ | 572 | $ | 610 | $ | 635 | ||||||
|
Reserve
adjustment
|
5 | 2 | 5 | |||||||||
|
Amounts
paid
|
(34 | ) | (40 | ) | (30 | ) | ||||||
|
Asbestos
reserve - end of period
|
$ | 543 | $ | 572 | $ | 610 | ||||||
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,
which generally approximates the mid-point of the estimated range of exposure
from model results. Ashland reviews this estimate and related
assumptions quarterly and annually updates the results of a non-inflated,
non-discounted approximate 50-year model developed with the assistance of
HR&A.
During
the most recent update completed during 2009, it was determined that the reserve
adjustment for asbestos claims should be increased by $5
million. Total reserves for asbestos claims were $543 million at
September 30, 2009 compared to $572 million at September 30,
2008.
Excluding
the Hercules asbestos claims further described below, 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.
For the
Ashland asbestos-related obligations, 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 62% of the estimated
receivables from insurance companies are expected to be due from domestic
insurers, of which approximately 83% have a credit rating of B+ or higher by A.
M. Best, as of September 30, 2009. The remainder of the insurance
receivable is due from London insurance companies, which generally have lower
credit quality ratings, and from
F-41
NOTE
P – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
Underwriters
at Lloyd’s, whose insurance policy obligations have been transferred to a
Berkshire Hathaway entity. Ashland discounts this piece of the
receivable based upon the projected timing of the receipt of cash from those
insurers unless likely settlement amounts can be determined.
At
September 30, 2009, Ashland’s receivable for recoveries of litigation defense
and claim settlement costs from insurers amounted to $422 million (excluding the
Hercules receivable for asbestos claims), of which $64 million relates to
costs previously paid. Receivables from insurers amounted to $458
million at September 30, 2008. During 2009, the model used for
purposes of valuing the asbestos reserve described above, and its impact on
valuation of future recoveries from insurers, was updated. This model
update along with potential settlement adjustments resulted in an additional $8
million net increase in the receivable for probable insurance
recoveries.
Hercules
asbestos-related litigation
Hercules,
a wholly owned subsidiary of Ashland, has liabilities from claims alleging
personal injury caused by exposure to asbestos. Such claims typically
arise from alleged exposure to asbestos fibers from resin encapsulated pipe and
tank products which were sold by one of Hercules’ former subsidiaries to a
limited industrial market. 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. A summary
of Hercules’ asbestos claims activity follows.
|
November
13, 2008
|
||||
|
through
|
||||
|
(In
thousands)
|
September
30, 2009
|
|||
|
Open
claims - November 13, 2008
|
27 | |||
|
New
claims filed
|
1 | |||
|
Claims
settled
|
- | |||
|
Claims
dismissed
|
(7 | ) | ||
|
Open
claims - end of period
|
21 | |||
A
progression of activity in the asbestos reserve is presented in the following
table.
|
November
13, 2008
|
||||
|
through
|
||||
|
(In
millions)
|
September
30, 2009
|
|||
|
Asbestos
reserve - November 13, 2008
|
$ | 233 | ||
|
Purchase
accounting reserve adjustment
|
261 | |||
|
Amounts
paid
|
(10 | ) | ||
|
Asbestos
reserve - end of period
|
$ | 484 | ||
In
November 2008, Ashland completed its acquisition of Hercules. At that
time, Hercules’ recorded reserve for asbestos claims was $233 million for
indemnity costs. Hercules’ accounting policy in recording reserves
for asbestos claims was to reserve at the lowest level of an estimated range of
exposure for indemnity claims, excluding estimates of future litigation defense
costs. Ashland’s accounting policy in recording reserves for asbestos
claims is to include amounts for the best estimate of projected indemnity and
litigation defense costs, which generally approximates the mid-point of the
estimated range of exposure from model results. As a result, Ashland
recorded a $105 million increase to the asbestos reserve for Hercules to include
projected defense costs. To do so, Ashland utilized several internal
models that it employs to estimate defense costs associated with asbestos
claims.
During
2009, Ashland included the Hercules claims within its annual assessment of these
matters, which includes running various non-inflated, non-discounted approximate
50-year models developed with the assistance of HR&A and determining from
the range of estimates in the models the amount it believes to be the best
estimate of future payments for litigation defense and claim settlement
costs. Based on Ashland’s assessment of the best estimate of the
range of exposure from the most recent model results, an additional $156 million
increase was recorded, which was accounted for as an adjustment to Hercules’
opening balance sheet because the adjustment related to claims that had been
incurred as of the acquisition date.
Total
reserves for Hercules asbestos claims were $484 million at September 30,
2009. Due to the number and diversity of Hercules asbestos claims
outstanding as of the acquisition date and how reliant the 50-year models are on
the accuracy of the claim data, Ashland’s review of the underlying claim files
as part of transitioning to a standardized claims management approach remains in
process. Ashland anticipates this will be finalized during the first
part of fiscal 2010. Once the review
F-42
of the
underlying claim files is completed, a final assessment of the Hercules asbestos
claims liability will be determined and any subsequent adjustment to the opening
balance sheet will be recorded during 2010 in the period
determined. The amounts recorded as of September 30, 2009 represent
Ashland's best estimate of the liability based on the current status of the
underlying claim files review.
As of
Ashland’s acquisition date of Hercules, all of the cash previously recovered and
placed into a trust from the settlements with certain of Hercules’ insurance
carriers had been exhausted. With the addition of estimated defense
and indemnity costs, the total Hercules asbestos reserve exceeded the amount
needed to obtain reimbursements pursuant to coverage-in-place agreements with
certain other insurance carriers. Accordingly, Ashland initially
estimated at the acquisition date the amount of future projected costs that will
be reimbursable by such insurance using a similar methodology as performed on
the historical Ashland asbestos liability and recorded a $35 million receivable
within the noncurrent asbestos insurance receivable caption of the Consolidated
Balance Sheet. Upon completion of the annual update during 2009, the
receivable was increased by $84 million reflecting the increase in
liability from the updated model incorporated within Ashland’s complete
valuation process. As of September 30, 2009, the receivables from
insurers amounted to $118 million. This estimated receivable
exclusively consists of domestic insurers, of which approximately 97% have a
credit rating of B+ or higher by A.M. Best, as of September 30,
2009.
Asbestos
litigation cost projection
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 that the asbestos reserves for Ashland and
Hercules represent the best estimate within a range of possible
outcomes. As a part of the process to develop these estimates of
future asbestos costs, a range of long-term cost models was
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 currently estimated in various approximate
50-year models 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 $800 million for the Ashland asbestos-related
litigation and approximately $800 million for the Hercules asbestos-related
litigation (or approximately $1.6 billion in the aggregate), 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.
Environmental
remediation and asset retirement obligations
Ashland
and Hercules are 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
September 30, 2009, such locations included 94 waste treatment or disposal sites
where Ashland and/or Hercules have been identified as a potentially responsible
party under Superfund or similar state laws, 162 current and former operating
facilities (including certain operating facilities conveyed to MAP) and about
1,220 service station properties, of which 160 are being actively
remediated.
Ashland’s
reserves for environmental remediation amounted to $221 million at September 30,
2009 compared to $149 million at September 30, 2008, of which $169 million
at September 30, 2009 and $112 million at September 30, 2008 were
classified in other noncurrent liabilities on the Consolidated Balance
Sheets. As a result of the Hercules acquisition on November 13, 2008,
Ashland assumed all Hercules’ environmental and asset retirement obligation
contingencies. Hercules’ obligations assumed by Ashland were $100
million, which includes an increase of $22 million for different
remediation approaches than previously assumed under Hercules’ valuation
models.
F-43
NOTE
P – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
The
following table provides a reconciliation of the changes in the environmental
remediation reserves during 2009.
|
(In
millions)
|
||||
|
Balance
at October 1, 2008
|
$ | 149 | ||
|
Inherited
Hercules obligations
|
100 | |||
|
Disbursements,
net of cost recoveries
|
(47 | ) | ||
|
Revised
obligation estimates and accretion
|
18 | |||
|
Foreign
currency translation
|
1 | |||
|
Balance
at September 30, 2009
|
$ | 221 | ||
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 discounts certain environmental sites and
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 September 30, 2009 and 2008, Ashland’s recorded
receivable for these probable insurance recoveries was $35 million and $40
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 $15 million, $11
million in 2008 and $15 million in 2007. Environmental remediation
expense, net of insurance receivables, was $13 million in 2009, $7 million in
2008 and $7 million in 2007.
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 is approximately $375 million, which
includes the Hercules sites. No individual remediation location is
material, as the largest reserve for any site is less than 10% of the
remediation reserve.
Other
legal proceedings and claims
In
addition to the matters described above, there are other various claims,
lawsuits and administrative proceedings pending or threatened against Ashland
and its current and former subsidiaries. Such actions are with
respect 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. For more information on these
claims, see the Legal Proceedings section of Form 10-K (Part I, Item
3).
NOTE Q – SEGMENT
INFORMATION
Following
the Hercules acquisition, Ashland’s businesses are managed along five industry
segments: Functional Ingredients, Water Technologies, Performance
Materials, Consumer Markets and Distribution.
Functional
Ingredients is one of the world’s largest producers of cellulose ethers and pale
wood rosin derivatives. It provides specialty additives and
functional ingredients that manage the physical properties of aqueous
(water-based) and nonaqueous systems. Many of its products are
derived from renewable and natural raw materials and perform in a wide variety
of applications.
Water
Technologies is a leading global producer of papermaking chemicals and a leading
specialty chemicals supplier to the pulp, paper, commercial and institutional,
food and beverage, chemical, mining and municipal markets. Its
process, water treatment and functional chemistries are used to improve
operational efficiencies, enhance product quality, protect plant assets, and
ensure environmental compliance.
Performance
Materials is a global leader in unsaturated polyester resins and vinyl ester
resins. In addition, it provides customers with leading technologies
in gelcoats, pressure-sensitive and structural adhesives, and metal casting
consumables and design services.
F-44
Consumer
Markets, which includes the Valvoline® family of products and services, is a
leading innovator, marketer and supplier of high-performing automotive
lubricants, chemicals and appearance products. Valvoline, the world’s
first lubricating oil, is the number three passenger car motor oil brand, and
Valvoline Instant Oil Change represents the number two quick-lube franchise in
the United States.
Distribution
is a leading plastics and chemicals distributor in North America. It distributes
chemicals, plastics and composite raw materials in North America, as well as
plastics in Europe and China. Ashland Distribution also provides
environmental services in North America, including hazardous and nonhazardous
waste collection, recovery, recycling and disposal services.
The following table presents for each segment the sales
and operating revenue and operating income for 2009, 2008, and 2007 and total
assets as of September 30, 2009 and 2008. Results of Ashland’s
reportable segments are presented based on its management structure and internal
accounting practices. The structure and practices are specific to
Ashland; therefore, the financial results of Ashland’s business segments are not
necessarily comparable with similar information for other comparable
companies. Ashland refines its expense allocation methodologies to
the reportable segments from time to time as internal accounting practices are
improved, more refined information becomes available and businesses
change. Revisions to Ashland’s methodologies that are deemed
insignificant are applied on a prospective basis. During 2009,
Ashland began fully allocating significant actual corporate costs, as opposed to
budgeted expenditures which was utilized in prior periods, except for certain
specific company-wide restructuring activities that were significant, such as
the current restructuring plan related to the Hercules acquisition described in
Note D, and other costs or adjustments that relate to former businesses that
Ashland no longer operates. To align prior period results to
the current period presentation, Ashland reclassified certain depreciation and
amortization charges in 2008 and 2007 that were previously presented within the
unallocated and other section to the applicable reporting segments that were
originally allocated these corporate charges.
Information
about Ashland’s domestic and international operations
follows. Ashland has no material operations in any individual
international country and no single customer represented more than 10% of sales
and operating revenues in 2009, 2008 or 2007.
|
Revenues
from
|
Property,
plant
|
|||||||||||||||||||||||||||
|
external
customers
|
Net
assets
|
and
equipment - net
|
||||||||||||||||||||||||||
|
(In
millions)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||
|
United
States
|
$ | 5,083 | $ | 5,549 | $ | 5,188 | $ | 609 | $ | 2,226 | $ | 1,205 | $ | 759 | ||||||||||||||
|
International
|
3,023 | 2,832 | 2,597 | 2,975 | 976 | 891 | 336 | |||||||||||||||||||||
| $ | 8,106 | $ | 8,381 | $ | 7,785 | $ | 3,584 | $ | 3,202 | $ | 2,096 | $ | 1,095 | |||||||||||||||
F-45
NOTE Q – SEGMENT INFORMATION
(continued)
|
Segment
Information
|
||||||||||||
|
Years
Ended September 30
|
|
|||||||||||
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
and operating revenues
|
||||||||||||
|
Functional
Ingredients
|
$ | 812 | $ | - | $ | - | ||||||
|
Water
Technologies
|
1,652 | 893 | 818 | |||||||||
|
Performance
Materials
|
1,106 | 1,621 | 1,580 | |||||||||
|
Consumer
Markets
|
1,650 | 1,662 | 1,525 | |||||||||
|
Distribution
|
3,020 | 4,374 | 4,031 | |||||||||
|
Intersegment
sales (a)
|
||||||||||||
|
Functional
Ingredients
|
(10 | ) | - | - | ||||||||
|
Water
Technologies
|
(3 | ) | - | (2 | ) | |||||||
|
Performance
Materials
|
(105 | ) | (151 | ) | (154 | ) | ||||||
|
Consumer
Markets
|
- | (6 | ) | (1 | ) | |||||||
|
Distribution
|
(16 | ) | (12 | ) | (12 | ) | ||||||
| $ | 8,106 | $ | 8,381 | $ | 7,785 | |||||||
|
Equity
income
|
||||||||||||
|
Functional
Ingredients
|
$ | - | $ | - | $ | - | ||||||
|
Water
Technologies
|
1 | 1 | 1 | |||||||||
|
Performance
Materials
|
6 | 16 | 10 | |||||||||
|
Consumer
Markets
|
8 | 5 | 4 | |||||||||
|
Distribution
|
- | - | - | |||||||||
|
Unallocated
and other
|
(1 | ) | 1 | - | ||||||||
| 14 | 23 | 15 | ||||||||||
|
Other
income
|
||||||||||||
|
Functional
Ingredients
|
- | - | - | |||||||||
|
Water
Technologies
|
1 | 2 | 3 | |||||||||
|
Performance
Materials
|
6 | 3 | 4 | |||||||||
|
Consumer
Markets
|
8 | 7 | 8 | |||||||||
|
Distribution
|
4 | 3 | 3 | |||||||||
|
Unallocated
and other
|
5 | 16 | 16 | |||||||||
| 24 | 31 | 34 | ||||||||||
| $ | 38 | $ | 54 | $ | 49 | |||||||
|
Operating
income (loss)
|
||||||||||||
|
Functional
Ingredients
|
$ | 36 | $ | - | $ | - | ||||||
|
Water
Technologies
|
78 | 10 | 16 | |||||||||
|
Performance
Materials
|
1 | 52 | 89 | |||||||||
|
Consumer
Markets
|
252 | 83 | 86 | |||||||||
|
Distribution
|
52 | 51 | 41 | |||||||||
|
Unallocated
and other
|
(29 | ) | 17 | (16 | ) | |||||||
| $ | 390 | $ | 213 | $ | 216 | |||||||
|
Assets
|
||||||||||||
|
Functional
Ingredients
|
$ | 2,782 | $ | - | $ | - | ||||||
|
Water
Technologies
|
1,919 | 495 | 514 | |||||||||
|
Performance
Materials
|
995 | 1,080 | 997 | |||||||||
|
Consumer
Markets
|
819 | 750 | 751 | |||||||||
|
Distribution
|
847 | 1,090 | 1,218 | |||||||||
|
Unallocated
and other
|
2,085 | 2,356 | 2,206 | |||||||||
| $ | 9,447 | $ | 5,771 | $ | 5,686 | |||||||
|
(a)
|
Intersegment
sales are accounted for at prices that approximate market
value.
|
F-46
|
Ashland
Inc. and Consolidated Subsidiaries
|
||||||||||||
|
Segment
Information (continued)
|
||||||||||||
|
Years
Ended September 30
|
||||||||||||
|
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Investment
in equity affiliates
|
||||||||||||
|
Functional
Ingredients
|
$ | - | $ | - | $ | - | ||||||
|
Water
Technologies
|
4 | 3 | 4 | |||||||||
|
Performance
Materials
|
54 | 59 | 49 | |||||||||
|
Consumer
Markets
|
18 | 15 | 14 | |||||||||
|
Distribution
|
- | - | - | |||||||||
|
Unallocated
and other
|
3 | 4 | 6 | |||||||||
| $ | 79 | $ | 81 | $ | 73 | |||||||
|
Operating
income not affecting cash
|
||||||||||||
|
Depreciation
and amortization
|
||||||||||||
|
Functional
Ingredients (a)
|
$ | 106 | $ | - | $ | - | ||||||
|
Water
Technologies (a)
|
99 | 29 | 29 | |||||||||
|
Performance
Materials
|
63 | 46 | 39 | |||||||||
|
Consumer
Markets
|
36 | 35 | 34 | |||||||||
|
Distribution
|
28 | 28 | 25 | |||||||||
|
Unallocated
and other
|
7 | 7 | 6 | |||||||||
| 339 | 145 | 133 | ||||||||||
|
Other
noncash items
|
||||||||||||
|
Functional
Ingredients
|
33 | - | - | |||||||||
|
Water
Technologies
|
11 | 1 | - | |||||||||
|
Performance
Materials
|
4 | (4 | ) | 7 | ||||||||
|
Consumer
Markets
|
4 | - | 7 | |||||||||
|
Distribution
|
7 | 2 | 3 | |||||||||
|
Unallocated
and other
|
- | 27 | 19 | |||||||||
| 59 | 26 | 36 | ||||||||||
| $ | 398 | $ | 171 | $ | 169 | |||||||
|
Property,
plant and equipment - net
|
||||||||||||
|
Functional
Ingredients
|
$ | 692 | $ | - | $ | - | ||||||
|
Water
Technologies (b)
|
362 | 102 | 108 | |||||||||
|
Performance
Materials
|
367 | 393 | 318 | |||||||||
|
Consumer
Markets
|
241 | 232 | 228 | |||||||||
|
Distribution
|
187 | 205 | 204 | |||||||||
|
Unallocated
and other (b)
|
247 | 163 | 109 | |||||||||
| $ | 2,096 | $ | 1,095 | $ | 967 | |||||||
|
Additions
to property, plant and equipment
|
||||||||||||
|
Functional
Ingredients
|
$ | 58 | $ | - | $ | - | ||||||
|
Water
Technologies
|
26 | 17 | 24 | |||||||||
|
Performance
Materials
|
27 | 48 | 56 | |||||||||
|
Consumer
Markets
|
33 | 42 | 28 | |||||||||
|
Distribution
|
8 | 27 | 29 | |||||||||
|
Unallocated
and other
|
22 | 71 | 17 | |||||||||
| $ | 174 | $ | 205 | $ | 154 | |||||||
|
(a)
|
Includes,
during 2009, amortization for purchased in-process research and
development of $5 million within both Functional Ingredients and Water
Technologies.
|
|
(b)
|
Fiscal
2008 and 2007 have been adjusted for the affects of the Drew Marine and
corporate aircraft assets that, during 2009, have been sold or moved to
held for sale classification within the Consolidated Balance
Sheet.
|
F-47
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
The
following table presents quarterly financial information and per share data
relative to Ashland’s Common Stock.
|
Quarters
ended
|
December
31
|
March
31
|
June
30
|
September
30
|
||||||||||||||||||||||||||||
|
(In
millions except per share data)
|
2008
|
2007
|
2009
|
2008
|
2009
|
2008
|
2009
|
(a) |
2008
|
(b) | ||||||||||||||||||||||
|
Sales
and operating revenues
|
$ | 1,966 | $ | 1,905 | $ | 1,990 | $ | 2,059 | $ | 2,037 | $ | 2,201 | $ | 2,113 | $ | 2,216 | ||||||||||||||||
|
Gross
profit as a percentage of sales
|
16.5 | % | 16.6 | % | 23.1 | % | 16.2 | % | 24.2 | % | 16.2 | % | 24.2 | % | 14.4 | % | ||||||||||||||||
|
Operating
(loss) income
|
(7 | ) | 46 | 112 | 52 | 152 | 87 | 133 | 28 | |||||||||||||||||||||||
|
(Loss)
income from continuing
|
||||||||||||||||||||||||||||||||
|
operations
|
(119 | ) | 38 | 48 | 72 | 51 | 66 | 98 | (1 | ) | ||||||||||||||||||||||
|
Net
(loss) income
|
(119 | ) | 33 | 48 | 72 | 50 | 72 | 93 | (10 | ) | ||||||||||||||||||||||
|
Basic
earnings per share
|
||||||||||||||||||||||||||||||||
|
Continuing
operations
|
$ | (1.73 | ) | $ | .61 | $ | .65 | $ | 1.14 | $ | .69 | $ | 1.04 | $ | 1.32 | $ | (.01 | ) | ||||||||||||||
|
Net
income (loss)
|
(1.73 | ) | .52 | .65 | 1.14 | .67 | 1.15 | 1.24 | (.15 | ) | ||||||||||||||||||||||
|
Diluted
earnings per share
|
||||||||||||||||||||||||||||||||
|
Continuing
operations
|
$ | (1.73 | ) | $ | .60 | $ | .65 | $ | 1.13 | $ | .68 | $ | 1.03 | $ | 1.30 | $ | (.01 | ) | ||||||||||||||
|
Net
income (loss)
|
(1.73 | ) | .52 | .65 | 1.13 | .66 | 1.13 | 1.22 | (.15 | ) | ||||||||||||||||||||||
|
Regular
cash dividends per share
|
$ | .075 | $ | .275 | $ | .075 | $ | .275 | $ | .075 | $ | .275 | $ | .075 | $ | .275 | ||||||||||||||||
|
Market
price per common share
|
||||||||||||||||||||||||||||||||
|
High
|
$ | 30.13 | $ | 68.99 | $ | 12.26 | $ | 49.88 | $ | 29.99 | $ | 58.58 | $ | 45.80 | $ | 48.97 | ||||||||||||||||
|
Low
|
8.02 | 45.79 | 5.35 | 39.82 | 10.76 | 47.01 | 23.76 | 26.81 | ||||||||||||||||||||||||
|
(a)
|
Fourth
quarter results include a decrease in operating income of $23 million for
severance and accelerated depreciation charges associated with
cost-structure efficiency initiatives as well as a pretax gain of $56
million related to the sale of Ashland’s interest in Drew Marine, a
division within Water Technologies.
|
|
(b)
|
Fourth
quarter results include a decrease in operating income of $7 million for
severance costs associated with cost-structure efficiency initiatives in
Performance Materials and Water
Technologies.
|
|
Ashland
Inc. and Consolidated Subsidiaries
|
||||||||||||||||||||
|
Schedule
II - Valuation and Qualifying Accounts
|
||||||||||||||||||||
|
Balance
at
|
Provisions
|
Acquisition
|
Balance
|
|||||||||||||||||
|
beginning
|
charged
to
|
Reserves
|
and
other
|
at
end
|
||||||||||||||||
|
(In
millions)
|
of
year
|
earnings
|
utilized
|
changes
|
of
year
|
|||||||||||||||
|
Year
ended September 30, 2009
|
||||||||||||||||||||
|
Reserves
deducted from asset accounts
|
||||||||||||||||||||
|
Accounts
receivable
|
$ | 33 | $ | 29 | $ | (23 | ) | $ | (1 | ) | $ | 38 | ||||||||
|
Inventories
|
11 | 13 | (3 | ) | - | 21 | ||||||||||||||
|
Tax
valuation allowance
|
26 | 16 | - | 264 | 306 | |||||||||||||||
|
Year
ended September 30, 2008
|
||||||||||||||||||||
|
Reserves
deducted from asset accounts
|
||||||||||||||||||||
|
Accounts
receivable
|
$ | 41 | $ | 10 | $ | (21 | ) | $ | 3 | $ | 33 | |||||||||
|
Inventories
|
13 | 2 | (4 | ) | - | 11 | ||||||||||||||
|
Tax
valuation allowance
|
23 | 3 | - | - | 26 | |||||||||||||||
|
Year
ended September 30, 2007
|
||||||||||||||||||||
|
Reserves
deducted from asset accounts
|
||||||||||||||||||||
|
Accounts
receivable
|
$ | 40 | $ | 24 | $ | (15 | ) | $ | (8 | ) | $ | 41 | ||||||||
|
Inventories
|
16 | 2 | (4 | ) | (1 | ) | 13 | |||||||||||||
|
Tax
valuation allowance
|
17 | 6 | - | - | 23 | |||||||||||||||
F-48
|
Ashland
Inc. and Consolidated Subsidiaries
|
||||||||||||||||||||
|
Five-Year
Selected Financial Information
|
||||||||||||||||||||
|
Years
Ended September 30
|
||||||||||||||||||||
|
(In
millions except per share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Summary
of operations
|
||||||||||||||||||||
|
Sales
and operating revenues
|
$ | 8,106 | $ | 8,381 | $ | 7,785 | $ | 7,233 | $ | 6,731 | ||||||||||
|
Costs
and expenses
|
||||||||||||||||||||
|
Cost
of sales and operating expenses
|
6,317 | 7,056 | 6,447 | 6,030 | 5,545 | |||||||||||||||
|
Selling,
general and administrative expenses
|
1,341 | 1,118 | 1,126 | 1,029 | 1,034 | |||||||||||||||
|
Research
and development expense
|
96 | 48 | 45 | 48 | 45 | |||||||||||||||
| 7,754 | 8,222 | 7,618 | 7,107 | 6,624 | ||||||||||||||||
|
Equity
and other income
|
38 | 54 | 49 | 44 | 564 | |||||||||||||||
|
Operating
income
|
390 | 213 | 216 | 170 | 671 | |||||||||||||||
|
Net
gain (loss) on divestitures
|
59 | 20 | (3 | ) | (5 | ) | 1,284 | |||||||||||||
|
Loss
on early retirement of debt
|
- | - | - | - | (145 | ) | ||||||||||||||
|
Net
interest and other financing (expense) income
|
(205 | ) | 28 | 46 | 47 | (82 | ) | |||||||||||||
|
Other
expenses
|
(86 | ) | - | - | - | - | ||||||||||||||
|
Income
from continuing operations
|
||||||||||||||||||||
|
before
income taxes
|
158 | 261 | 259 | 212 | 1,728 | |||||||||||||||
|
Income
tax (expense) benefit
|
(80 | ) | (86 | ) | (58 | ) | (29 | ) | 230 | |||||||||||
|
Income
from continuing operations
|
78 | 175 | 201 | 183 | 1,958 | |||||||||||||||
|
(Loss)
income from discontinued operations
|
(7 | ) | (8 | ) | 29 | 224 | 46 | |||||||||||||
|
Net
income
|
$ | 71 | $ | 167 | $ | 230 | $ | 407 | $ | 2,004 | ||||||||||
|
Balance
sheet information (as of September 30)
|
||||||||||||||||||||
|
Current
assets
|
$ | 2,473 | $ | 3,026 | $ | 3,276 | $ | 4,250 | $ | 3,757 | ||||||||||
|
Current
liabilities
|
1,566 | 1,230 | 1,152 | 2,041 | 1,545 | |||||||||||||||
|
Working
capital
|
$ | 907 | $ | 1,796 | $ | 2,124 | $ | 2,209 | $ | 2,212 | ||||||||||
|
Total
assets
|
$ | 9,447 | $ | 5,771 | $ | 5,686 | $ | 6,590 | $ | 6,815 | ||||||||||
|
Short-term
debt
|
$ | 23 | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Long-term
debt (including current portion)
|
1,590 | 66 | 69 | 82 | 94 | |||||||||||||||
|
Stockholders’
equity
|
3,584 | 3,202 | 3,154 | 3,096 | 3,739 | |||||||||||||||
|
Capital
employed
|
$ | 5,197 | $ | 3,268 | $ | 3,223 | $ | 3,178 | $ | 3,833 | ||||||||||
|
Cash
flow information
|
||||||||||||||||||||
|
Cash
flows from operating activities from
|
||||||||||||||||||||
|
continuing
operations
|
$ | 1,027 | $ | 478 | $ | 189 | $ | 145 | $ | (76 | ) | |||||||||
|
Additions
to property, plant and equipment
|
174 | 205 | 154 | 175 | 180 | |||||||||||||||
|
Cash
dividends
|
22 | 69 | 743 | 78 | 79 | |||||||||||||||
|
Common
stock information
|
||||||||||||||||||||
|
Basic
earnings per share
|
||||||||||||||||||||
|
Income
from continuing operations
|
$ | 1.08 | $ | 2.78 | $ | 3.20 | $ | 2.57 | $ | 26.85 | ||||||||||
|
Net
income
|
0.98 | 2.65 | 3.66 | 5.73 | 27.49 | |||||||||||||||
|
Diluted
earnings per share
|
||||||||||||||||||||
|
Income
from continuing operations
|
1.07 | 2.76 | 3.15 | 2.53 | 26.23 | |||||||||||||||
|
Net
income
|
0.96 | 2.63 | 3.60 | 5.64 | 26.85 | |||||||||||||||
|
Regular
cash dividends per share
|
0.30 | 1.10 | 1.10 | 1.10 | 1.10 | |||||||||||||||
|
Special
cash dividend per share - Note M
|
- | - | 10.20 | - | - | |||||||||||||||
F-49