ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE E – DISCONTINUED OPERATIONS (continued)
Corporation (Riley), a former subsidiary of Ashland, and from the acquisition of Hercules during fiscal 2009, a wholly owned subsidiary of Ashland. Adjustments to the recorded litigation reserves and related insurance receivables continue periodically and primarily reflect updates to the estimates. See Note M for more information related to the adjustments on asbestos liabilities and receivables.
Ashland’s divestiture of Ashland Paving And Construction (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 Condensed 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 the three month periods ended December 31, 2010 and 2009. Such adjustments to these and other divested businesses 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.
Components of amounts reflected in the Statements of Consolidated Income related to discontinued operations are presented in the following table for the three months ended December 31, 2010 and 2009.
|
|
|
|
|
|
Three months ended
|
|
|
|
December 31
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
Income from discontinued operations (net of tax)
|
|
|
|
|
|
|
Distribution (a)
|
|
$ |
23 |
|
|
$ |
12 |
|
Asbestos-related litigation reserves and receivables
|
|
|
1 |
|
|
|
9 |
|
Gain on disposal of discontinued operations (net of tax)
|
|
|
|
|
|
|
|
|
APAC
|
|
|
1 |
|
|
|
1 |
|
Total income from discontinued operations (net of tax)
|
|
$ |
25 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
For the three months ended December 31, 2010 and 2009, the pretax income reported for Distribution was $32 million and $19 million, respectively.
|
NOTE F – RESTRUCTURING ACTIVITIES
Ashland periodically implements restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure for each business. The total restructuring cost incurred for these programs for the three months ended December 31, 2009 was $2 million and was classified within the selling, general and administrative expenses caption. Additional costs from reductions in resources, facilities and business realignment or divestitures may occur in future periods, which could include charges related to additional severance, plant closings, reassessed pension plan valuations or other items.
As of December 31, 2010, the remaining restructuring reserves for these programs principally consisted of severance payments from the Hercules Integration Plan and the recent Performance Materials restructuring, which consisted of several plant closings and operational redesign to eliminate excess capacity that was announced during the prior fiscal year.
The following table details at December 31, 2010 and 2009, the amount of restructuring reserves related to the programs discussed above, and the related activity in these reserves for the three months ended December 31, 2010 and 2009. The reserves are included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet and are expected to be fully utilized by the end of fiscal 2011.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE F – RESTRUCTURING ACTIVITIES (continued)
|
|
|
|
(In millions)
|
|
Severance
|
|
Balance as of September 30, 2009
|
|
$ |
38 |
|
Restructuring reserve
|
|
|
2 |
|
Utilization (cash paid or otherwise settled)
|
|
|
(9 |
) |
Balance at December 31, 2009
|
|
$ |
31 |
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
$ |
26 |
|
Utilization (cash paid or otherwise settled)
|
|
|
(5 |
) |
Balance at December 31, 2010
|
|
$ |
21 |
|
|
|
|
|
|
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 occasional market quotes or sales of similar instruments or 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 (market approach), 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.
The following table summarizes financial asset instruments subject to recurring fair value measurements as of December 31, 2010. Ashland did not have any financial liability instruments subject to recurring fair value measurements as of December 31, 2010.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE G – FAIR VALUE MEASUREMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
Total
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Carrying
|
|
|
fair
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
(In millions)
|
|
value
|
|
|
value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
374 |
|
|
$ |
374 |
|
|
$ |
374 |
|
|
$ |
- |
|
|
$ |
- |
|
Auction rate securities
|
|
|
22 |
|
|
|
22 |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
Deferred compensation investments (a)
|
|
|
176 |
|
|
|
176 |
|
|
|
64 |
|
|
|
112 |
|
|
|
- |
|
Investment of captive insurance company (a)
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
Total assets at fair value
|
|
$ |
574 |
|
|
$ |
574 |
|
|
$ |
440 |
|
|
$ |
112 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Included in other noncurrent assets in the Condensed Consolidated Balance Sheet. |
|
|
|
|
|
|
The following table summarizes financial asset instruments subject to recurring fair value measurements as of September 30, 2010. Ashland did not have any financial liability instruments subject to recurring fair value measurements as of September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
markets for
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
Total
|
|
|
identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
Carrying
|
|
|
fair
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
(In millions)
|
|
value
|
|
|
value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
417 |
|
|
$ |
417 |
|
|
$ |
417 |
|
|
$ |
- |
|
|
$ |
- |
|
Auction rate securities
|
|
|
22 |
|
|
|
22 |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
Deferred compensation investments (a)
|
|
|
169 |
|
|
|
169 |
|
|
|
62 |
|
|
|
107 |
|
|
|
- |
|
Investment of captive insurance company (a)
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
Total assets at fair value
|
|
$ |
610 |
|
|
$ |
610 |
|
|
$ |
481 |
|
|
$ |
107 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Included in other noncurrent assets in the Condensed Consolidated Balance Sheet. |
|
|
|
|
|
|
|
|
Level 3 instruments
Auction rate securities
At December 31, 2010 and September 30, 2010, Ashland held at par value $25 million of 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. 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, these instruments have been classified as noncurrent assets in the Condensed Consolidated Balance Sheet.
During the December 2009 quarter, Ashland liquidated $50 million par value auction rate securities for $44 million in cash proceeds, which approximated book value. 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).
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE G – FAIR VALUE MEASUREMENTS (continued)
|
|
|
|
(In millions)
|
|
Level 3
|
|
Balance as of October 1, 2010
|
|
$ |
22 |
|
Sales of auction rate securities
|
|
|
- |
|
Balance as of December 31, 2010
|
|
$ |
22 |
|
|
|
|
|
|
Balance as of October 1, 2009
|
|
$ |
170 |
|
Sales of auction rate securities
|
|
|
(44 |
) |
Balance as of December 31, 2009
|
|
$ |
126 |
|
|
|
|
|
|
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 the functional currency of an entity.
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. For the three months ended December 31, 2010 and 2009, losses of less than $1 million and $1 million, respectively, were recorded in the Statement of Consolidated Income for these contracts. 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.
Ashland’s net loss position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of December 31, 2010 was less than $1 million, consisting of a gain of $1 million with a notional amount of $94 million offset by a loss of $1 million with a notional amount of $93 million, and was included in other noncurrent assets and liabilities, respectively. The net gain position on foreign currency derivatives outstanding in the Condensed Consolidated Balance Sheet as of September 30, 2010 was $1 million, consisting of a gain of $2 million with a notional amount of $86 million offset by a loss of $1 million with a notional amount of $41 million, and was included in other noncurrent assets and liabilities, respectively. As of December 31, 2010, 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. 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 caption. As of December 31, 2010 and September 30, 2010, the fair value on the interest rate cap was less than $1 million and recorded within the other noncurrent assets caption of the Condensed Consolidated Balance Sheet.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE G – FAIR VALUE MEASUREMENTS (continued)
Other financial instruments
At December 31, 2010 and September 30, 2010, Ashland’s long-term debt had a carrying value of $1,153 million compared to a fair value of $1,398 million and $1,402 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.
NOTE H – INVENTORIES
Inventories are carried at the lower of cost or market. Certain chemicals, plastics and lubricants are valued at cost using the last-in, first-out (LIFO) method. The remaining inventories are stated at cost using the average cost method. The following table summarizes Ashland’s inventories as of the reported Condensed Consolidated Balance Sheet dates.
|
|
|
|
|
|
|
|
|
December 31
|
|
|
September 30
|
|
(In millions)
|
|
2010
|
|
|
2010
|
|
Finished products
|
|
$ |
368 |
|
|
$ |
326 |
|
Raw materials, supplies and work in process
|
|
|
180 |
|
|
|
175 |
|
LIFO carrying values
|
|
|
(51 |
) |
|
|
(54 |
) |
|
|
$ |
497 |
|
|
$ |
447 |
|
|
|
|
|
|
|
|
|
|
NOTE I – GOODWILL AND OTHER INTANGIBLES
In accordance with U.S. GAAP, Ashland reviews goodwill and other intangible assets for impairment annually and when events and circumstances indicate an impairment may have occurred. The 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 and Consumer Markets reportable segments. Prior to its sale to TPG, Distribution was treated as a separate reporting unit for allocation of goodwill. Ashland performed its most recent annual goodwill impairment test as of July 1, 2010, and determined at that time, that no impairment existed.
The following is a progression of goodwill by segment for the period ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Functional
|
|
|
Water
|
|
|
Performance
|
|
|
|
Consumer
|
|
|
|
|
(In millions)
|
|
Ingredients
|
|
|
Technologies
|
|
|
Materials
|
|
(a)
|
|
Markets
|
|
|
Total
|
|
Balance at September 30, 2010
|
|
$ |
1,080 |
|
|
$ |
620 |
|
|
$ |
333 |
|
|
|
$ |
115 |
|
|
$ |
2,148 |
|
Divestitures
|
|
|
- |
|
|
|
- |
|
|
|
(52 |
) |
|
|
|
- |
|
|
|
(52 |
) |
Currency translation adjustment
|
|
|
(13 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
(13 |
) |
Balance at December 31, 2010
|
|
$ |
1,067 |
|
|
$ |
620 |
|
|
$ |
281 |
|
|
|
$ |
115 |
|
|
$ |
2,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Within the Performance Materials reportable segment as of September 30, 2010, because further discrete financial information is provided and management regularly reviews this information, this reportable segment was further broken down into the Castings Solutions and Composite Polymers/Specialty Polymers and Adhesives reporting units. Goodwill consisted of $52 million and $281 million, respectively, for the Castings Solutions and Composite Polymers/Specialty Polymers and Adhesives reporting units as of September 30, 2010. The reduction of $52 million of goodwill is related to the contribution of Ashland’s Castings Solutions business to the expanded global joint venture with Süd-Chemie.
|
Intangible assets principally consist of trademarks and trade names, intellectual property, customer lists and sale contracts. Intangible assets 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 3 to 24 years and other intangibles over 2 to 50 years.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE I – GOODWILL AND OTHER INTANGIBLES (continued)
Certain intangible assets within trademarks and trade names have been classified as indefinite lived and had a balance of $290 million as of December 31, 2010 and September 30, 2010. In accordance with U.S. GAAP, Ashland annually reviews these 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 models did not indicate any impairment. Intangible assets were comprised of the following as of December 31, 2010 and September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
(In millions)
|
|
amount
|
|
|
amortization
|
|
|
amount
|
|
Trademarks and trade names
|
|
$ |
353 |
|
|
$ |
(28 |
) |
|
$ |
325 |
|
Intellectual property
|
|
|
331 |
|
|
|
(68 |
) |
|
|
263 |
|
Customer relationships
|
|
|
579 |
|
|
|
(87 |
) |
|
|
492 |
|
Other intangibles
|
|
|
35 |
|
|
|
(26 |
) |
|
|
9 |
|
Total intangible assets
|
|
$ |
1,298 |
|
|
$ |
(209 |
) |
|
$ |
1,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
(In millions)
|
|
amount
|
|
|
amortization
|
|
|
amount
|
|
Trademarks and trade names
|
|
$ |
353 |
|
|
$ |
(27 |
) |
|
$ |
326 |
|
Intellectual property
|
|
|
331 |
|
|
|
(63 |
) |
|
|
268 |
|
Customer relationships
|
|
|
583 |
|
|
|
(78 |
) |
|
|
505 |
|
Other intangibles
|
|
|
39 |
|
|
|
(27 |
) |
|
|
12 |
|
Total intangible assets
|
|
$ |
1,306 |
|
|
$ |
(195 |
) |
|
$ |
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recognized on intangible assets for the three months ended December 31 was $17 million for 2010 and $18 million for 2009 and is primarily included in the selling, general and administrative expenses caption of the Statements of Consolidated Income. Estimated amortization expense for future periods is $69 million in 2011 (includes three months actual and nine months estimated), $67 million in 2012, $66 million in 2013, $64 million in 2014 and $62 million in 2015.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE J – DEBT
The following table summarizes Ashland’s current and long-term debt as of the reported Condensed Consolidated Balance Sheet dates.
|
|
|
|
|
|
|
|
|
December 31
|
|
|
September 30
|
|
|
|
2010
|
|
|
2010
|
|
Term Loan A, due 2014 (a)
|
|
$ |
289 |
|
|
$ |
293 |
|
6.60% notes, due 2027
|
|
|
12 |
|
|
|
12 |
|
Accounts receivable securitization
|
|
|
40 |
|
|
|
40 |
|
9.125% notes, due 2017
|
|
|
631 |
|
|
|
630 |
|
Medium-term notes, due 2013-2019, interest at a weighted-
|
|
|
|
|
|
|
|
|
average rate of 8.4% at December 31, 2010 (7.7% to 9.4%)
|
|
|
21 |
|
|
|
21 |
|
8.80% debentures, due 2012
|
|
|
20 |
|
|
|
20 |
|
Hercules Tianpu - term notes, due through 2011
|
|
|
7 |
|
|
|
14 |
|
Hercules Nanjing - term notes, due 2013
|
|
|
45 |
|
|
|
34 |
|
6.50% junior subordinated notes, due 2029
|
|
|
127 |
|
|
|
126 |
|
International revolver agreements, interest at a weighted-
|
|
|
|
|
|
|
|
|
average rate of 5.1% at December 31, 2010 (1.3% to 9.8%)
|
|
|
36 |
|
|
|
30 |
|
Other
|
|
|
2 |
|
|
|
4 |
|
Total debt
|
|
|
1,230 |
|
|
|
1,224 |
|
Short-term debt
|
|
|
(77 |
) |
|
|
(71 |
) |
Current portion of long-term debt
|
|
|
(39 |
) |
|
|
(45 |
) |
Long-term debt (less current portion)
|
|
$ |
1,114 |
|
|
$ |
1,108 |
|
|
|
|
|
|
|
|
|
|
(a)
|
Senior credit facilities.
|
The scheduled aggregate maturities of debt by fiscal year are as follows: $106 million remaining in 2011, $43 million in 2012, $85 million in 2013, $214 million in 2014, $9 million in 2015 and $0 million in 2016. Total borrowing capacity remaining under the $550 million revolving credit facility was $442 million, representing a reduction of $108 million for letters of credit outstanding at December 31, 2010. Additionally, at December 31, 2010, the outstanding amount of accounts receivable sold by Ashland to a wholly-owned “bankruptcy remote” special purpose subsidiary of Ashland was $585 million. As of December 31, 2010, Ashland had drawn $40 million of the approximate $328 million in available funding from qualifying receivables under this accounts receivable securitization facility.
Covenant restrictions
The Senior Credit Facilities include less restrictive covenants than the previous credit facility and no longer contain covenants associated with minimum consolidated net worth and capital expenditure limits. The covenants contain certain usual and customary representations and warranties, and usual and customary affirmative and negative covenants which include financial covenants; limitations on liens, additional indebtedness, further negative pledges, investments, payment of dividends, mergers, sale of assets and restricted payments; and other customary limitations. As of December 31, 2010, Ashland is in compliance with all debt agreement covenant restrictions.
The maximum consolidated leverage ratio permitted under the Senior Credit Facilities are as follows: 3.00 from the period December 31, 2010 through September 30, 2011 and 2.75 from December 31, 2011 and each fiscal quarter thereafter. The permitted consolidated fixed charge coverage ratio under the Senior Credit Facility is 1.50 from December 31, 2010 and for each fiscal quarter thereafter.
At December 31, 2010, Ashland’s calculation of the consolidated leverage ratio was 0.9 compared to the maximum consolidated leverage ratio permitted under Ashland’s Senior Credit Agreement of 3.00. At December 31, 2010, Ashland’s calculation of the fixed charge coverage ratio was 4.6 compared to the permitted consolidated ratio of
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE J – DEBT (continued)
1.50. The expected sale of Distribution will cause Ashland to amend its previous calculation of these financial ratios, but will not have a significant affect on the current cushion within the ratio results.
NOTE K – INCOME TAXES
Ashland’s effective tax rate is generally subjected to adjustments related to discrete items and changes within foreign effective tax rates resulting from income or loss fluctuations. The overall effective tax rate of 33.3% for the three months ended December 31, 2010 includes certain discrete items such as a $16 million tax expense from the $19 million pretax gain associated with the fair market value of the Castings Solutions contribution and a $4 million tax benefit associated with research and development tax credits for the 2010 fiscal year. In addition, the effective tax rate during this period was favorably impacted by $3 million from other miscellaneous discrete tax items.
The overall effective tax rate of 25.6% for the three months ended December 31, 2009 includes a benefit of $6 million associated with the reversal of certain foreign tax reserves.
Changes in unrecognized tax benefits are summarized as follows for the three months ended December 31, 2010.
|
|
|
|
(In millions)
|
|
|
|
Balance at October 1, 2010
|
|
$ |
116 |
|
Increases related to positions taken on items from prior years
|
|
|
5 |
|
Increases related to positions taken in the current year
|
|
|
1 |
|
Lapse of statute of limitations
|
|
|
(3 |
) |
Balance at December 31, 2010
|
|
$ |
119 |
|
|
|
|
|
|
It is reasonably possible that the amount of the unrecognized tax benefits may increase or decrease within the next twelve months as the result of settlements from ongoing audits, which may have material affect on the Condensed Consolidated Financial Statements.
NOTE L – EMPLOYEE BENEFIT PLANS
For the three months ended December 31, 2010, Ashland contributed $5 million to the U.S. benefit plans and $3 million to the non-U.S. benefit plans. Ashland expects to make additional contributions to the U.S. plans of approximately $10 million and to the non-U.S. plans of $25 million during the remainder of fiscal year 2011. The following table details the components of pension and other postretirement benefit costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other postretirement
|
|
|
|
Pension benefits
|
|
benefits
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Three months ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
13 |
|
|
$ |
13 |
|
|
$ |
1 |
|
|
$ |
1 |
|
Interest cost
|
|
|
50 |
|
|
|
51 |
|
|
|
4 |
|
|
|
5 |
|
Expected return on plan assets
|
|
|
(57 |
) |
|
|
(54 |
) |
|
|
- |
|
|
|
- |
|
Amortization of prior service credit
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization of net actuarial loss (gain)
|
|
|
19 |
|
|
|
13 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
$ |
24 |
|
|
$ |
23 |
|
|
$ |
4 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE M – 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 Stoker Corporation, a former subsidiary.
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 those related to Hercules, follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
Years ended September 30 |
|
(In thousands)
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2008
|
|
Open claims - beginning of period
|
|
|
83
|
|
|
|
100
|
|
|
|
100
|
|
|
|
115
|
|
|
|
134
|
|
New claims filed
|
|
|
-
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Claims settled
|
|
|
-
|
|
|
|
(1
|
) |
|
|
(1
|
) |
|
|
(1
|
) |
|
|
(2
|
) |
Claims dismissed
|
|
|
(4
|
) |
|
|
(8
|
) |
|
|
(18
|
) |
|
|
(16
|
) |
|
|
(21
|
) |
Open claims - end of period
|
|
|
79
|
|
|
|
92
|
|
|
|
83
|
|
|
|
100
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A progression of activity in the asbestos reserve is presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
Years ended September 30
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Asbestos reserve - beginning of period
|
|
$ |
537 |
|
|
$ |
543 |
|
|
$ |
543 |
|
|
$ |
572 |
|
|
$ |
610 |
|
Reserve adjustment
|
|
|
- |
|
|
|
- |
|
|
|
28 |
|
|
|
5 |
|
|
|
2 |
|
Amounts paid
|
|
|
(11 |
) |
|
|
(12 |
) |
|
|
(34 |
) |
|
|
(34 |
) |
|
|
(40 |
) |
Asbestos reserve - end of period
|
|
$ |
526 |
|
|
$ |
531 |
|
|
$ |
537 |
|
|
$ |
543 |
|
|
$ |
572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Total reserves for asbestos claims were $526 million at December 31, 2010 compared to $537 million at September 30, 2010.
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
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE M – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
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 69% of the estimated receivables from insurance companies are expected to be due from domestic insurers, of which approximately 84% have a credit rating of B+ or higher by A. M. Best, as of December 31, 2010. 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. During the December 2009 quarter, Ashland entered into a new agreement with a number of London market insurance companies with respect to coverage for asbestos-related insurance claims. As a result, a $12 million increase to the Ashland asbestos receivable was recorded within the Condensed Consolidated Balance Sheet as of December 31, 2009, which had a $9 million (after-tax) effect on the Statement of Consolidated Income for the December 2009 quarter within the discontinued operations caption. As a result of this agreement and other revised estimates, Ashland no longer discounts any portion of the asbestos receivable at this time.
At December 31, 2010, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $414 million (excluding the Hercules receivable for asbestos claims), of which $59 million relates to costs previously paid. Receivables from insurers amounted to $421 million at September 30, 2010. During the June 2010 quarter, 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 likely settlement adjustments, caused an additional $24 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. 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.
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Year ended |
|
|
|
December 31
|
|
|
|
September 30 |
(In thousands)
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
(a) |
Open claims - beginning of period
|
|
|
20
|
|
|
|
21
|
|
|
|
21
|
|
|
|
27
|
|
New claims filed
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Claims dismissed/settled
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
) |
|
|
(7
|
) |
Open claims - end of period
|
|
|
22
|
|
|
|
21
|
|
|
|
20
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Beginning of period represents acquisition date of November 13, 2008.
A progression of activity in the asbestos reserve is presented in the following table.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE M – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
December 31
|
|
|
September 30
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
(a) |
Asbestos reserve - beginning of period
|
|
$ |
375 |
|
|
$ |
484 |
|
|
$ |
484 |
|
|
$ |
233 |
|
Reserve adjustments (b)
|
|
|
- |
|
|
|
(35 |
) |
|
|
(93 |
) |
|
|
261 |
|
Amounts paid
|
|
|
(5 |
) |
|
|
(2 |
) |
|
|
(16 |
) |
|
|
(10 |
) |
Asbestos reserve - end of period
|
|
$ |
370 |
|
|
$ |
447 |
|
|
$ |
375 |
|
|
$ |
484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Beginning of period represents acquisition date of November 13, 2008.
(b) Includes purchase accounting adjustments recorded during 2010 and 2009 as part of purchase price allocations for the Hercules acquisition.
During the December 2009 quarter, Ashland essentially completed the final valuation assessment of the Hercules asbestos claims liability existing as of the acquisition date and underlying claim files as part of transitioning to a standardized claims management approach. This assessment resulted in a $35 million and $22 million reduction to the asbestos liability and receivable, respectively, which was accounted for as an adjustment to Hercules’ opening balance sheet since the adjustment related to claims that had been incurred as of the acquisition date. During the most recent annual update of this estimate, completed during the June 2010 quarter, it was determined that the liability for asbestos claims should be reduced by $58 million. Based upon review of the assumptions underlying the asbestos valuation model and the most recent claim filing and settlement trend rates for both pre- and post-acquisition periods, Ashland determined that $14 million of the $58 million adjustment should be recorded to goodwill, which was partially offset by $6 million for an increase in probable insurance recoveries, totalling to a net $8 million adjustment to goodwill. Total reserves for Hercules asbestos claims were $370 million at December 31, 2010 compared to $375 million at September 30, 2010.
For the Hercules 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. The estimated receivable consists exclusively of domestic insurers, of which approximately 98% have a credit rating of B+ or higher by A.M. Best, as of December 31, 2010.
As of December 31, 2010 and September 30, 2010, the receivables from insurers amounted to $68 million. As previously mentioned, during the June 2010 quarter, the model used for purposes of valuing the asbestos reserve and its impact on valuation of future recoveries from insurers was updated. This model update along with likely settlement adjustments caused a $28 million reduction in the receivable for probable insurance recoveries, $6 million of which was recorded to goodwill. For the Hercules asbestos-related obligations, certain reimbursements pursuant to coverage-in-place agreements with insurance carriers exist. As a result, increases in the asbestos reserve are partially offset by probable insurance recoveries.
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 INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE M – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
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 $830 million for the Ashland asbestos-related litigation and approximately $570 million for the Hercules asbestos-related litigation (or approximately $1.4 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 further increase 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 December 31, 2010, such locations included 93 waste treatment or disposal sites where Ashland and/or Hercules have been identified as a potentially responsible party under Superfund or similar state laws, 152 current and former operating facilities (including certain operating facilities conveyed to MAP) and about 1,225 service station properties, of which 115 are being actively remediated.
Ashland’s reserves for environmental remediation amounted to $204 million at December 31, 2010 compared to $207 million at September 30, 2010, of which $159 million at December 31, 2010 and $162 million at September 30, 2010 were classified in other noncurrent liabilities on the Condensed Consolidated Balance Sheets.
The following table provides a reconciliation of the changes in the environmental contingencies and asset retirement obligations during the three months ended December 31, 2010 and 2009.
|
|
|
|
|
|
Three months ended
|
|
|
|
December 31
|
|
(In millions)
|
|
2010
|
|
|
2009
|
|
Reserve - beginning of period
|
|
$ |
207 |
|
|
$ |
221 |
|
Inherited Hercules obligations
|
|
|
- |
|
|
|
6 |
|
Disbursements, net of cost recoveries
|
|
|
(7 |
) |
|
|
(7 |
) |
Revised obligation estimates and accretion
|
|
|
4 |
|
|
|
3 |
|
Foreign currency translation
|
|
|
- |
|
|
|
(1 |
) |
Reserve - end of period
|
|
$ |
204 |
|
|
$ |
222 |
|
|
|
|
|
|
|
|
|
|
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 continues to discount 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 December 31, 2010 and September 30, 2010, Ashland’s recorded receivable for these probable insurance recoveries was $29 million and $30 million, respectively. Environmental remediation expense, included within the selling, general and administrative expenses caption of the Statements of Consolidated Income, amounted to $5 million and $2 million for the three months ended December 31, 2010 and 2009, respectively. Environmental remediation expense, net of receivable activity, was $4 million and $1 million for the three months ended December 31, 2010 and 2009, respectively.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE M – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland’s ability to estimate its share of the costs. Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology, and the number and financial strength of other potentially responsible parties at multiparty sites. Although it is not possible to predict with certainty the ultimate costs of environmental remediation, Ashland currently estimates that the upper end of the reasonably possible range of future costs for identified sites could be as high as approximately $360 million. No individual remediation location is material, as the largest reserve for any site is less than 10% of the remediation reserve.
Other legal proceedings and claims
Ashland Consumer Markets has established an engine guarantee associated with its ValvolineTM product line. Consumers register their vehicles to qualify for the guarantee. Ashland insures this program with a third party and therefore carries no reserve for this guarantee program.
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, environmental 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.
NOTE N – EARNINGS PER SHARE
The following is the computation of basic and diluted earnings per share (EPS) from continuing operations. Stock options, SARs and warrants (assumed as part of the Hercules acquisition) available to purchase shares outstanding for each reporting period whose grant price was greater than the average market price of Ashland Common Stock for each applicable period 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 approximately 2.0 million and 2.1 million as of December 31, 2010 and 2009, respectively.
|
|
|
|
|
|
Three months ended
|
|
|
|
December 31
|
|
(In millions except per share data)
|
|
2010
|
|
|
2009
|
|
Numerator
|
|
|
|
|
|
|
Numerator for basic and diluted EPS – Income
|
|
|
|
|
|
|
from continuing operations
|
|
$ |
62 |
|
|
$ |
64 |
|
Denominator
|
|
|
|
|
|
|
|
|
Denominator for basic EPS – Weighted-average
|
|
|
|
|
|
|
|
|
common shares outstanding
|
|
|
79 |
|
|
|
77 |
|
Share based awards convertible to common shares
|
|
|
1 |
|
|
|
1 |
|
Denominator for diluted EPS – Adjusted weighted-
|
|
|
|
|
|
|
|
|
average shares and assumed conversions
|
|
|
80 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
EPS from continuing operations
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.79 |
|
|
$ |
.84 |
|
Diluted
|
|
$ |
.78 |
|
|
$ |
.82 |
|
|
|
|
|
|
|
|
|
|
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE O – CAPITAL STOCK
During the first quarter of fiscal 2011, the Board of Directors of Ashland announced and paid a quarterly cash dividend of 15 cents per share to eligible shareholders of record. This amount was double the quarterly cash dividend of 7.5 cents per share paid in the December 2009 quarter.
In November 2009, Ashland made a voluntary pension plan contribution of approximately 3.0 million shares of Ashland Common Stock, valued at $100 million on the date of transfer.
NOTE P – STOCK INCENTIVE PLANS
Ashland has stock incentive plans under which key employees or directors are granted stock-settled stock appreciation rights (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 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. Stock-based compensation expense was $4 million and $3 million for the three months ended December 31, 2010 and 2009, respectively, and is included in the selling, general and administrative expenses caption of the Statements of Consolidated Income.
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 essentially ten years after the date of grant. SARs granted for the three months ended December 31, 2010 and 2009 were 0.6 million. As of December 31, 2010, there was $18 million of total unrecognized compensation costs related to SARs. That cost is expected to be recognized over a weighted-average period of 2.5 years. 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.
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 are forfeitable until vesting requirements are met, which is generally over a one-to-five-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 (or dividend equivalents) upon grant. Nonvested stock awards granted for the three months ended December 31, 2010 and 2009 were 12,100 and 30,000 shares, respectively. As of December 31, 2010, there was $6 million of total unrecognized compensation costs related to nonvested stock awards. That cost is expected to be recognized over a weighted-average period of 2.2 years.
Performance shares
Performance share/unit awards are granted to certain key employees and 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 are recorded as a liability in the Condensed Consolidated Balance Sheets within the other noncurrent liabilities caption. 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
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE P – STOCK INCENTIVE PLANS (continued)
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. Performance shares/units granted for the three months ended December 31, 2010 and 2009 were 0.2 million. As of December 31, 2010, there was $11 million of total unrecognized compensation costs related to performance shares/units. That cost is expected to be recognized over a weighted-average period of 2.4 years.
NOTE Q – SEGMENT INFORMATION
Ashland has recently been comprised of five reporting segments. Following the expected sale of Distribution, Ashland’s businesses will now be managed along four industry segments: Functional Ingredients, Water Technologies, Performance Materials and Consumer Markets.
Functional Ingredients is one of the world’s largest producers of cellulose ethers. It provides specialty additives and functional ingredients that primarily manage the physical properties of water-based 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, utility 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. As previously discussed in Note D, on November 30, 2010 Ashland completed the transaction to expand the global joint venture with Süd-Chemie, serving the foundry chemical sector. As part of the transaction, Ashland transferred its existing Castings Solutions business to the expanded joint venture. Effective December 1, 2010, Ashland’s share of the joint venture’s results of operations are recorded as equity income in the Statements of Consolidated Income. As a result, future reported results will no longer include the sales, cost of sales or selling, general and administrative costs related to this business. Ashland will include the financial effects within the equity income caption of the Statements of Consolidated Income.
Consumer Markets, which includes the ValvolineTM family of products and services, is a leading innovator, marketer and supplier of high-performing automotive lubricants, chemicals and appearance products. ValvolineTM, the world’s first lubricating oil, is the number three passenger car motor oil brand, and Valvoline Instant Oil ChangeTM is the number two quick-lube franchise in the United States.
The following table presents for each segment the net sales and operating income for the three months ended December 31, 2010 and 2009. 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 occasionally modifies its expense allocation methodologies to the reportable segments 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, while significant changes are applied on a retroactive basis. The unallocated and other caption includes certain specific company-wide restructuring activities that were significant, such as the restructuring plan related to the Hercules acquisition described in Note C, and other costs or adjustments that relate to former businesses that Ashland no longer operates, including the Distribution business.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q – SEGMENT INFORMATION
|
|
|
|
|
|
Three months ended
|
|
|
|
December 31
|
|
(In millions - unaudited)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
SALES
|
|
|
|
|
|
|
Functional Ingredients
|
|
$ |
216 |
|
|
$ |
210 |
|
Water Technologies
|
|
|
451 |
|
|
|
443 |
|
Performance Materials (a)
|
|
|
326 |
|
|
|
271 |
|
Consumer Markets
|
|
|
440 |
|
|
|
400 |
|
|
|
$ |
1,433 |
|
|
$ |
1,324 |
|
OPERATING INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Functional Ingredients
|
|
$ |
19 |
|
|
$ |
27 |
|
Water Technologies
|
|
|
24 |
|
|
|
39 |
|
Performance Materials
|
|
|
6 |
|
|
|
8 |
|
Consumer Markets
|
|
|
65 |
|
|
|
67 |
|
Unallocated and other (b)
|
|
|
(15 |
) |
|
|
(14 |
) |
|
|
$ |
99 |
|
|
$ |
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The three months ended December 31, 2010 includes only two months of sales related to the Castings Solutions business, as Ashland contributed this business to its new global joint venture with Süd-Chemie on November 30, 2010.
|
(b)
|
Includes $11 million and $13 million of costs for the three months ended December 31, 2010 and 2009, respectively, previously charged to the Distribution business. These costs include former Distribution liabilities that have been retained by Ashland such as pension, postretirement and environmental costs, as well as indirect corporate cost allocations previously charged to this business.
|
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements including, without limitation, statements made under the caption “Management’s Discussion and Analysis” (MD&A), within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, Ashland may from time to time make forward-looking statements in its other filings with the Securities and Exchange Commission (SEC), press releases and other written and oral communications. These forward-looking statements are based on Ashland’s expectations and assumptions, as of the date such statements are made, regarding Ashland’s future operating performance and financial condition, the economy and other future events or circumstances. Ashland’s expectations and assumptions include, without limitation, those mentioned within the MD&A, 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, and the ability to recover raw material cost increases through price increases), the closing of the sale of the Distribution business and the expected benefits to be realized by Ashland from the sale, weather, and legal proceedings and claims (including environmental and asbestos matters). Various risks and uncertainties may cause actual results to differ materially from those stated, projected or implied by any forward-looking statements, including, without limitation, risks and uncertainties affecting Ashland that are described in Item 1A Risk Factors of its most recent Form 10-K filed with the SEC, which is available on Ashland’s website at http://investor.ashland.com or on the SEC’s website at www.sec.gov. Ashland believes its expectations and assumptions are reasonable, but there can be no assurance that the expectations reflected herein will be achieved. Ashland undertakes no obligation to subsequently update any forward-looking statements made in this Form 10-Q or otherwise except as required by securities or other applicable law.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements herein.
BUSINESS OVERVIEW
Ashland profile
Ashland is a global specialty chemicals company with approximately 14,500 employees worldwide in more than 100 countries. Ashland provides specialty chemicals, technologies and insights to create new and improved products. Ashland’s chemistry is used in a variety of industries that include automotive, food and beverages, personal care products, pharmaceuticals, paper and tissue to durable goods and infrastructure, including building and construction, energy and water treatment.
Ashland’s sales generated outside of North America were 45% for the three months ended December 31, 2010 and 2009, respectively. Sales by region expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Sales by Geography
|
|
|
|
|
|
2010
|
|
|
2009
|
|
North America
|
|
|
|
|
|
55
|
% |
|
55
|
% |
Europe
|
|
|
|
|
|
24
|
% |
|
26
|
% |
Asia Pacific
|
|
|
|
|
|
13
|
% |
|
13
|
% |
Latin America & other
|
|
|
|
|
|
8
|
% |
|
6
|
% |
|
|
|
|
|
|
100
|
% |
|
100
|
% |
|
|
|
|
|
|
|
|
|
|
|
Business segments
Ashland’s reporting structure is composed of four reporting segments: Ashland Aqualon Functional Ingredients (Functional Ingredients), Ashland Hercules Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets).
The contribution to sales by each of the four business segments expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Sales by Business Segment
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Functional Ingredients
|
|
|
|
|
|
15
|
% |
|
16
|
% |
Water Technologies
|
|
|
|
|
|
31
|
% |
|
33
|
% |
Performance Materials
|
|
|
|
|
|
23
|
% |
|
21
|
% |
Consumer Markets
|
|
|
|
|
|
31
|
% |
|
30
|
% |
|
|
|
|
|
|
100
|
% |
|
100
|
% |
|
|
|
|
|
|
|
|
|
|
|
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
During fiscal 2011 and other previous periods, the following operational decisions and economic developments had an impact on Ashland’s current and future cash flows, results of operations and financial position.
Economic environment
Ashland has experienced modest demand increases within each operating segment; however, its current financial performance has been adversely impacted by escalating raw material costs. Ashland continues to emphasize efficient pricing procedures to offset these increased costs, while internally assessing operations for cost reduction opportunities, such as Performance Materials’ recent operational redesign to eliminate excess capacity by closing several plants.
Divestitures/Acquisitions
Distribution divestiture
On November 5, 2010, Ashland signed a definitive agreement with TPG Accolade, LLC (TPG) to sell substantially all of the assets of its global distribution business conducted by the Ashland Distribution (Distribution) segment. The transaction is an asset sale with the total cash proceeds expected to be $930 million, before transaction fees and taxes, subject to post-closing working capital adjustments and certain other adjustments, as specified in the definitive agreement. Ashland anticipates recording a significant gain, which includes a tax valuation allowance release of approximately $60 million to $70 million, upon the closing of the transaction, which is expected at the end of the March 2011 quarter. The closing is subject to regulatory approvals and satisfaction of other customary closing conditions. Ashland Distribution recorded sales of $3,419 million during the most recently completed fiscal year ended September 30, 2010 and employs approximately 2,000 employees across North America and Europe.
Since this transaction signifies Ashland’s exit from the Distribution business, it qualifies as a discontinued operation. Therefore, the results of operations of Distribution have been classified as discontinued operations for all periods presented. Certain indirect corporate costs previously allocated to the Distribution reporting segment that do not qualify for discontinued operations accounting classification are now reported as costs within the Unallocated and other section of continuing operations, and for the three months ended December 31, 2010 and 2009 were $7 million and $9 million, respectively. Ashland is currently analyzing and developing plans to reduce these costs.
Ashland will retain and has agreed to indemnify TPG for certain liabilities of the Distribution business arising prior to the closing of the sale, which include pension and other postretirement benefits, as well as certain other potential liabilities, including certain litigation and environmental liabilities relating to the pre-closing period, as described in the agreement. Costs related to these expenses were $4 million for the three months ended December 31, 2010 and 2009 and have been included within the Unallocated and other section of continuing operations.
As part of this pending sale, Ashland expects to receive transition service fees for services to be provided to TPG subsequent to the completion of the sale. While the transition service agreements are expected to vary in duration depending upon the type of service provided, Ashland expects to reduce costs as the transition services are completed. See Notes D and E of Notes to Condensed Consolidated Financial Statements for additional information on the Distribution divestiture.
Süd-Chemie joint venture agreement
In July 2010, Ashland and Süd-Chemie AG (Süd-Chemie) signed an agreement for the formation of an expanded global joint venture serving the foundry chemical sector. The transaction closed on November 30, 2010 and combined three businesses: Ashland’s Castings Solutions business group, Süd-Chemie’s Foundry-Products and Specialty Resins business unit, and Ashland-Südchemie-Kernfest GmbH (ASK), the existing fifty-percent owned European-based joint venture between Ashland and Süd-Chemie, for which Ashland historically only recognized equity income of the joint venture within its consolidated results. Ashland’s Castings Solutions and ASK businesses recorded sales of $279 million and $145 million, respectively, during each businesses’ most recently
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
completed fiscal year. The Foundry-Products and Specialty Resins business unit of Süd-Chemie contributed to the joint venture generated sales of approximately $146 million for its most recently completed fiscal year.
During the fifth year of the joint venture’s operations, Ashland will have the option to sell its shares in the expanded global joint venture to Süd-Chemie under mutually agreed terms. If Ashland does not execute this option by the end of the sixth year of the joint venture’s operations, Süd-Chemie will have the option to acquire Ashland’s shares under mutually agreed terms. Under both options, if mutually agreed terms cannot be reached, then the fair market value of the shares will be determined through an appraisal process set forth in the agreement.
Upon closing of the transaction, the joint venture distributed a $21 million net payment to Ashland in accordance with the agreement. Ashland anticipates receiving an additional cash payment from the joint venture during the March 2011 quarter, resulting from post-closing activities and measurements set forth in the agreement, which is expected to be approximately $25 million. Ashland recognized a pretax gain of $19 million, attributable to the fair market value of the net assets contributed to the joint venture. For the majority of the valuation of the contributed assets and liabilities, Ashland utilized the discounted cash flow method; however, the adjusted book value method was also used in some areas of the valuation. The gain was included in the net gain on acquisitions and divestitures caption in the Statement of Consolidated Income for the three months ended December 31, 2010.
Ashland’s equity interest in the expanded joint venture qualifies for equity method accounting treatment under U.S. GAAP. As a result, future reported results of the Castings Solutions business will no longer include the sales, cost of sales or selling, general and administrative costs related to this business; however, Ashland will include the financial effects within the equity income caption of the Statements of Consolidated Income. In addition, the expanded joint venture will leave certain stranded costs that Ashland is currently analyzing and developing plans to reduce.
Ara Quimica acquisition
In April 2010, Ashland acquired the remaining 50% interest in Ara Quimica S.A. (Ara Quimica), a leading producer of custom unsaturated polyester resin formulations for the composites industry in South America, for $28 million. Prior to the acquisition, Ashland owned a 50% interest in Ara Quimica, which it recorded as an equity method investment within the Performance Materials reporting segment. Ara Quimica recorded sales of approximately $56 million from its most recent fiscal year ended September 30, 2010. As a result of this transaction, Ashland recorded $19 million of current assets and $61 million of long-term assets, which included $55 million of goodwill and intangible assets. In addition, Ashland recorded $18 million of current liabilities and $6 million of noncurrent liabilities.
Pinova divestiture
In January 2010, Ashland sold its refined wood rosin and natural wood terpenes business, formerly known as Pinova, a business unit of Functional Ingredients, to TorQuest Partners in a transaction valued at approximately $75 million before tax, which was comprised of $60 million in cash and a $15 million five-year promissory note from TorQuest Partners. The Pinova business, with annual sales of approximately $85 million per year, had approximately 200 employees along with an associated manufacturing facility located in Brunswick, Georgia. As part of this transaction, TorQuest Partners has agreed to continue to manufacture certain products on behalf of Ashland.
Hercules acquisition
On November 13, 2008, Ashland completed its acquisition of Hercules Incorporated (Hercules). The total merger consideration for outstanding Hercules Common Stock was $2,594 million, including $2,096 million in cash, $450 million in Ashland Common Stock with the remaining value of the transaction related to cash consideration and value for restricted stock units, stock options and transaction costs. In addition, Ashland inherited $798 million in debt as a part of the transaction. The acquired businesses of Hercules now comprise the Functional Ingredients reporting segment, as well as a significant portion of the Water Technologies reporting segment. The total debt borrowed upon the closing of the merger was approximately $2,300 million with the remaining cash consideration for the transaction paid from Ashland’s existing cash at the date of the transaction.
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
Functional Ingredients HEC manufacturing facility
In November 2010, Functional Ingredients’ new Natrosol™ hydroxyethylcellulose (HEC) production facility in Nanjing, China became operational. At $90 million, the new facility represents Ashland’s largest single investment in China and the Asia Pacific region. This manufacturing facility will increase Functional Ingredients’ HEC production capacity by 10,000 metric tons per year and has expanded capabilities to produce up to 20,000 metric tons per year. Ashland is expecting the facility to increase its production throughout fiscal 2011 with a target to produce up to its initial maximum capacity by the end of the 2011 calendar year. Ashland expects that this additional supply will significantly aid in relieving certain capacity constraints in this product line.
Liquidity and corporate credit ratings
Ashland’s available liquidity position, which includes cash and the revolving credit and accounts receivable securitization facilities, was $1,104 million at December 31, 2010 as compared to $1,155 million at September 30, 2010. In addition to anticipated increases in liquidity from cash flows generated from operations, Ashland expects additional cash proceeds of approximately $825 million, after fees and taxes, from the sale of Distribution, positioning the company for future strategic investment opportunities. In connection with the expected sale of Distribution, Ashland intends to terminate the accounts receivable securitization facility during the upcoming March 2011 quarter.
Ashland’s corporate credit ratings have remained unchanged since its 10-K filing in late November, which were BB+ and Ba1 from Standard & Poor’s and Moody’s Investor Services, respectively, with an outlook of positive from both. Ashland’s ability to access capital markets to provide liquidity has also remained stable. However, the expected increased liquidity from the Distribution sale, along with improvements in the credit markets and Ashland’s financial performance, should continue to allow Ashland to borrow on more favorable terms in the future, including less restrictive covenants and lower interest rates.
RESULTS OF OPERATIONS – CONSOLIDATED REVIEW
Use of non-GAAP measures
Based on January 2010 clarification and interpretive guidance from the Securities and Exchange Commission regarding the use of non-GAAP measures, Ashland has included within this document certain non-GAAP measures which include EBITDA (operating income plus depreciation and amortization), adjusted EBITDA (EBITDA adjusted for key items, which may include pro forma affects for significant acquisitions or divestitures, as applicable), adjusted EBITDA margin (adjusted EBITDA divided by sales, which can include pro forma adjustments) and free cash flow (cash flows by operating activities from continuing operations minus cash dividends paid and additions to property, plant and equipment). Such measurements are not prepared in accordance with U.S. GAAP and should not be construed as an alternative to reported results determined in accordance with U.S. GAAP. Management believes the use of such non-GAAP measures on a consolidated and business segment basis assists investors in understanding the ongoing operating performance by presenting the financial results between periods on a more comparable basis. In addition, certain