=============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
OR
|_| 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 1-2918
ASHLAND INC.
(a Kentucky corporation)
I.R.S. No. 61-0122250
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, Kentucky 41012-0391
Telephone Number (859) 815-3333
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Indicate by checkmark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes |X| No |_|
At December 31, 2004, there were 72,084,548 shares of Registrant's
Common Stock outstanding. One Right to purchase one-thousandth of a share
of Series A Participating Cumulative Preferred Stock accompanies each
outstanding share of Registrant's Common Stock.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
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Three months ended
December 31
------------------------
(In millions except per share data) 2004 2003
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REVENUES
Sales and operating revenues $ 2,177 $ 1,936
Equity income 146 38
Other income 17 13
----------- ----------
2,340 1,987
COSTS AND EXPENSES
Cost of sales and operating expenses 1,849 1,611
Selling, general and administrative expenses 311 284
----------- ----------
2,160 1,895
----------- ----------
OPERATING INCOME 180 92
Net interest and other financial costs (31) (30)
----------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 149 62
Income taxes (55) (23)
----------- ----------
INCOME FROM CONTINUING OPERATIONS 94 39
Results from discontinued operations (net of income taxes) - Note B - (5)
----------- ----------
NET INCOME $ 94 $ 34
=========== ==========
BASIC EARNINGS PER SHARE - NOTE A
Income from continuing operations $ 1.30 $ .56
Results from discontinued operations - (.07)
----------- ----------
Net income $ 1.30 $ .49
=========== ==========
DILUTED EARNINGS PER SHARE - NOTE A
Income from continuing operations $ 1.28 $ .56
Results from discontinued operations - (.07)
----------- ----------
Net income $ 1.28 $ .49
=========== ==========
DIVIDENDS PAID PER COMMON SHARE $ .275 $ .275
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------------------
December 31 September 30 December 31
(In millions) 2004 2004 2003
--------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 146 $ 243 $ 201
Accounts receivable 1,252 1,331 1,083
Allowance for doubtful accounts (40) (41) (38)
Inventories - Note A 538 458 483
Deferred income taxes 95 103 110
Other current assets 106 208 103
-------------- -------------- --------------
2,097 2,302 1,942
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) 2,856 2,713 2,335
Goodwill 567 513 527
Asbestos insurance receivable (noncurrent portion) 396 399 403
Other noncurrent assets 370 319 296
-------------- -------------- --------------
4,189 3,944 3,561
PROPERTY, PLANT AND EQUIPMENT
Cost 3,166 3,104 3,087
Accumulated depreciation, depletion and amortization (1,889) (1,848) (1,809)
-------------- -------------- --------------
1,277 1,256 1,278
-------------- -------------- --------------
$ 7,563 $ 7,502 $ 6,781
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt due within one year $ 575 $ 439 $ 145
Trade and other payables 1,197 1,362 1,123
Income taxes 69 14 56
-------------- -------------- --------------
1,841 1,815 1,324
NONCURRENT LIABILITIES
Long-term debt (less current portion) 1,087 1,109 1,429
Employee benefit obligations 438 428 399
Deferred income taxes 248 367 221
Reserves of captive insurance companies 177 179 173
Asbestos litigation reserve (noncurrent portion) 553 568 562
Other long-term liabilities and deferred credits 375 330 355
Commitments and contingencies - Notes D and G
-------------- -------------- --------------
2,878 2,981 3,139
COMMON STOCKHOLDERS' EQUITY 2,844 2,706 2,318
-------------- -------------- --------------
$ 7,563 $ 7,502 $ 6,781
============== ============== ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCKHOLDERS' EQUITY
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Accumulated
other
Common Paid-in Retained comprehensive
(In millions) stock capital earnings loss Total
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BALANCE AT OCTOBER 1, 2003 $ 68 $ 350 $ 1,961 $ (126) $ 2,253
Total comprehensive income (1) 34 30 64
Cash dividends (19) (19)
Issued 643,390 common shares under
stock incentive and other plans 1 19 20
-------------- -------------- -------------- -------------- --------------
BALANCE AT DECEMBER 31, 2003 $ 69 $ 369 $ 1,976 $ (96) $ 2,318
============== ============== ============== ============== ==============
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BALANCE AT OCTOBER 1, 2004 $ 72 $ 478 $ 2,262 $ (106) $ 2,706
Total comprehensive income (1) 94 39 133
Cash dividends (20) (20)
Issued 505,385 common shares under
stock incentive and other plans 25 25
-------------- -------------- -------------- -------------- --------------
BALANCE AT DECEMBER 31, 2004 $ 72 $ 503 $ 2,336 $ (67) $ 2,844
============== ============== ============== ============== ==============
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(1) Reconciliations of net income to total comprehensive income follow.
Three months ended
December 31
--------------------------------
(In millions) 2004 2003
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Net income $ 94 $ 34
Unrealized translation adjustments 35 29
Related tax benefits 2 1
Net unrealized gains on cash flow hedges 2 -
-------------- --------------
Total comprehensive income $ 133 $ 64
============== ==============
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At December 31, 2004, the accumulated other comprehensive loss of $67
million (after tax) was comprised of net unrealized translation gains
of $60 million, a minimum pension liability of $129 million and net
unrealized gains on cash flow hedges of $2 million.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
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Three months ended
December 31
-----------------------
(In millions) 2004 2003
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CASH FLOWS FROM OPERATIONS
Income from continuing operations $ 94 $ 39
Expense (income) not affecting cash
Depreciation, depletion and amortization 46 48
Deferred income taxes 17 21
Equity income from affiliates (146) (38)
Distributions from equity affiliates 1 148
Other items 2 -
Change in operating assets and liabilities (1) (68) (150)
---------- ----------
(54) 68
CASH FLOWS FROM FINANCING
Proceeds from issuance of common stock 20 17
Repayment of long-term debt (98) (38)
Increase in short-term debt 211 -
Dividends paid (20) (19)
---------- ----------
113 (40)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment (55) (53)
Purchase of operations - net of cash acquired (95) -
Other - net 2 9
---------- ----------
(148) (44)
---------- ----------
CASH USED BY CONTINUING OPERATIONS (89) (16)
Cash used by discontinued operations (8) (6)
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (97) (22)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 243 223
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 146 $ 201
========== ==========
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(1) Excludes changes resulting from operations acquired or sold.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE A - SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL REPORTING
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and
Securities and Exchange Commission regulations. Although such
statements are subject to any year-end audit adjustments which may
be necessary, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. These financial statements
should be read in conjunction with Ashland's Annual Report on Form
10-K for the fiscal year ended September 30, 2004. Results of
operations for the period ended December 31, 2004, are not
necessarily indicative of results to be expected for the year
ending September 30, 2005.
INVENTORIES
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December 31 September 30 December 31
(In millions) 2004 2004 2003
--------------------------------------------------------------------------------------------------------------------
Chemicals and plastics $ 449 $ 370 $ 372
Construction materials 69 71 61
Petroleum products 69 61 71
Other products 53 45 53
Supplies 6 6 4
Excess of replacement costs over LIFO carrying values (108) (95) (78)
-------------- -------------- --------------
$ 538 $ 458 $ 483
============== ============== ==============
EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share (EPS) from continuing operations.
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Three months ended
December 31
-----------------------
(In millions except per share data) 2004 2003
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NUMERATOR
Numerator for basic and diluted EPS - Income
from continuing operations $ 94 $ 39
========== ==========
DENOMINATOR
Denominator for basic EPS - Weighted average
common shares outstanding 72 69
Common shares issuable upon exercise of stock options 1 -
---------- ----------
Denominator for diluted EPS - Adjusted weighted
average shares and assumed conversions 73 69
========== ==========
EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Basic $ 1.30 $ .56
Diluted $ 1.28 $ .56
6
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE B - DISCONTINUED OPERATIONS
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, a former
subsidiary. During the quarter ended December 31, 2003, Ashland
recorded a charge of $15 million to increase its reserve for
asbestos claims, the effect of which was partially offset by an $8
million credit to increase its asbestos insurance receivable. The
resulting $7 million pretax charge to income, net of deferred
income tax benefits of $2 million, was reflected as an after-tax
loss from discontinued operations of $5 million in the Statement
of Consolidated Income for the three months ended December 31,
2003. No adjustments were recorded to the asbestos reserve or
insurance receivable in the quarter ended December 31, 2004. See
Note G for further discussion of Ashland's asbestos-related
litigation.
Components of amounts reflected in the income statements related
to discontinued operations are presented in the following table.
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Three months ended
December 31
-----------------------
(In millions) 2004 2003
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PRETAX LOSS FROM DISCONTINUED OPERATIONS
Reserves for asbestos-related litigation $ - $ (7)
INCOME TAXES
Reserves for asbestos-related litigation - 2
---------- ----------
RESULTS FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES) $ - $ (5)
========== ==========
NOTE C - UNCONSOLIDATED AFFILIATES
Separate financial statements for MAP required by Rule 3-09 of
Regulation S-X will be filed as an amendment to Ashland's Annual
Report on Form 10-K within 90 days after the end of MAP's fiscal
year, which ended December 31, 2004. Unaudited income statement
information for MAP is shown below.
MAP is organized as a limited liability company that has elected
to be taxed as a partnership. Therefore, the parents are
responsible for income taxes applicable to their share of MAP's
taxable income. The net income reflected below for MAP does not
include any provision for income taxes that will be incurred by
its parents.
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Three months ended
December 31
------------------------
(In millions) 2004 2003
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Sales and operating revenues $ 12,516 $ 9,558
Income from operations 380 99
Net income 386 96
Ashland's equity income 142 32
7
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE C - UNCONSOLIDATED AFFILIATES (CONTINUED)
On March 19, 2004, Ashland announced the signing of an agreement
under which it would transfer its 38% interest in Marathon Ashland
Petroleum LLC ("MAP") and two wholly-owned businesses to Marathon
Oil Corporation ("Marathon") in a transaction structured to be
generally tax free and valued at approximately $3 billion. The two
businesses are Ashland's maleic anhydride business and 61
Valvoline Instant Oil Change centers. The transaction is subject
to several previously disclosed conditions, including approval by
Ashland's shareholders, consent from Ashland's public debt holders
and receipt of a favorable private letter ruling from the Internal
Revenue Service ("IRS") with respect to the tax treatment of the
transaction.
On December 20, 2004 and January 25, 2005, Ashland provided
updates on the status of the proposed transaction. The updates
included information about the status of the requested tax
rulings. Ashland and Marathon have continued their discussions
with the IRS and are discussing with the IRS modifications of the
proposed transaction that would allow a tax efficient transfer of
Ashland's interest in MAP to Marathon. These modifications would
require Ashland and Marathon to negotiate amendments to the Master
Agreement executed by Ashland and Marathon on March 18, 2004.
There can be no assurance that an agreement on a modified
transaction will be reached. If an agreement is reached on a
modified transaction, it is likely that the transaction would
close in the second calendar quarter of 2005.
NOTE D - LEASES AND OTHER COMMITMENTS
LEASES
Under various operating leases, Ashland has made guarantees with
respect to the residual value of the underlying property. If
Ashland had canceled those leases at December 31, 2004, its
maximum obligations under the residual value guarantees would have
amounted to $94 million. Ashland does not expect to incur any
significant charge to earnings under these guarantees, $24 million
of which relates to real estate. These lease agreements are with
unrelated third party lessors and Ashland has no additional
contractual or other commitments to any party to the leases.
OTHER COMMITMENTS
Ashland has guaranteed 38% of MAP's payments for certain crude oil
purchases, up to a maximum guarantee of $95 million. At December
31, 2004, Ashland's contingent liability under this guarantee
amounted to $76 million. Although Ashland has not made and does
not expect to make any payments under this guarantee, it has
recorded the fair value of the guarantee obligation, which is not
significant.
NOTE E - EMPLOYEE BENEFIT PLANS
On December 8, 2003, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the Act) was signed into law. Among
other things, the Act will expand Medicare to include an
outpatient prescription drug benefit beginning in 2006, as well as
provide a subsidy for sponsors of retiree health care plans that
provide a benefit that is at least actuarially equivalent to the
Medicare Act benefits. In May 2004, the Financial Accounting
Standards Board issued Staff Position No. FAS 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." Regulations
implementing major provisions of the Act, including the
determination of actuarial equivalency, were issued in January
2005. Ashland is currently evaluating the impact of the Act on its
postretirement benefit plans and has not determined the effect of
the Act on its financial statements.
8
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE E - EMPLOYEE BENEFIT PLANS (continued)
Presently, Ashland anticipates contributing $86 million to its
U.S. pension plans and $8 million to its non-U.S. pension plans
during fiscal 2005. As of December 31, 2004, contributions of $5
million have been made to the U.S. plans and $1 million to the
non-U.S. plans.
The following table details the components of pension and other
postretirement benefit costs.
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Other postretirement
Pension benefits benefits
------------------------ -------------------------
(In millions) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31
Service cost $ 13 $ 13 $ 2 $ 4
Interest cost 20 18 5 6
Expected return on plan assets (19) (16) - -
Amortization of prior service credit - - (2) (6)
Amortization of net actuarial loss 8 7 1 2
---------- ---------- ----------- -----------
$ 22 $ 22 $ 6 $ 6
========== ========== =========== ===========
NOTE F - ACQUISITIONS
During the three months ended December 31, 2004, Ashland Specialty
Chemical acquired Dow Chemical's DERAKANE(R) epoxy vinyl ester
resins business for approximately $90 million. With this
acquisition, Ashland Specialty Chemical's composite polymers
business continues to build its innovative line of resin
chemistries for composite manufacturing. The purchase included all
technology and intellectual property assets associated with the
DERAKANE resin business. No physical assets were transferred to
Ashland. Also during the quarter, APAC acquired two asphalt
plants. Following is a progression of goodwill by segment for the
three months ended December 31, 2004.
------------------------------------------------------------------------------------------------------------------------
Ashland
Specialty
(In millions) APAC Chemical Valvoline Total
------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 1, 2004 $ 411 $ 96 $ 6 $ 513
Goodwill acquired - 50 - 50
Currency translation adjustments - 4 - 4
---------- --------- ---------- ----------
BALANCE AT DECEMBER 31, 2004 $ 411 $ 150 $ 6 $ 567
========== ========= ========== ==========
NOTE G - LITIGATION, CLAIMS AND CONTINGENCIES
ASBESTOS-RELATED LITIGATION
Ashland is subject to liabilities from claims alleging personal
injury caused by exposure to asbestos. Such claims result
primarily from indemnification obligations undertaken in 1990 in
connection with the sale of Riley 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.
9
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE G - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
A summary of asbestos claims activity follows. 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.
----------------------------------------------------------------------------------------------------------------------
Three months ended
December 31 Years ended September 30
--------------------------- ------------------------------------------
(In thousands) 2004 2003 2004 2003 2002
----------------------------------------------------------------------------------------------------------------------
Open claims - beginning of period 196 198 198 160 167
New claims filed 3 7 29 66 45
Claims settled (3) (2) (7) (7) (15)
Claims dismissed (6) (5) (24) (21) (37)
----------- ----------- ----------- ----------- -----------
Open claims - end of period 190 198 196 198 160
=========== =========== =========== =========== ===========
Since October 1, 2001, Riley has been dismissed as a defendant in
73% of the resolved claims. Amounts spent on litigation defense
and claim settlements averaged $1,723 per claim resolved in the
three months ended December 31, 2004, compared to $1,746 in the
three months ended December 31, 2003, and annual averages of
$1,655 in 2004, $1,610 in 2003 and $723 in 2002. 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) 2004 2003 2004 2003 2002
-----------------------------------------------------------------------------------------------------------------------
Asbestos reserve - beginning of period $ 618 $ 610 $ 610 $ 202 $ 199
Expense incurred - 15 59 453 41
Amounts paid (15) (13) (51) (45) (38)
----------- ----------- ----------- ----------- ------------
Asbestos reserve - end of period $ 603 $ 612 $ 618 $ 610 $ 202
=========== =========== =========== =========== ============
During the December 2002 quarter, Ashland increased its reserve
for asbestos claims by $390 million to cover the litigation
defense and claim settlement costs for probable and reasonably
estimable future payments related to existing open claims, as well
as an estimate of those that may be filed in the future. Prior to
December 31, 2002, the asbestos reserve was based on the estimated
costs that would be incurred to settle existing open claims. A
range of estimates of future asbestos claims and related costs
using various assumptions was developed with the assistance of
Hamilton, Rabinovitz & Alschuler, Inc. (HR&A). The methodology
used by HR&A to project future asbestos costs was based largely on
Ashland's recent experience, including claim-filing and settlement
rates, disease mix, open claims, and litigation defense and claim
settlement costs. Ashland's claim experience was 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 estimated 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 recorded the amount it
believed to be the best estimate, which represented the expected
payments for litigation defense and claim settlement costs during
the next ten years. Subsequent updates to this estimate have been
made, with the assistance of HR&A, based on a combination of a
number of factors including the actual volume of new claims,
recent settlement costs, changes in the mix of alleged disease,
enacted legislative changes and other developments impacting
10
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE G - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
Ashland's estimate of future payments. Ashland's reserve for
asbestos claims on an undiscounted basis amounted to $603 million
at December 31, 2004, compared to $618 million at September 30,
2004 and $612 million at December 31, 2003.
Projecting future asbestos costs is subject to numerous variables
that are extremely difficult to predict. In addition to the
significant uncertainties surrounding the number of claims that
might be received, other variables include the type and severity
of the disease alleged by each claimant, the long latency period
associated with asbestos exposure, dismissal rates, costs of
medical treatment, the impact of bankruptcies of other companies
that are co-defendants in claims, uncertainties surrounding the
litigation process from jurisdiction to jurisdiction and from case
to case, and the impact of potential changes in legislative or
judicial standards. Furthermore, any predictions with respect to
these variables are subject to even greater uncertainty as the
projection period lengthens. In light of these inherent
uncertainties, Ashland believes its asbestos reserve represents
the best estimate within a range of possible outcomes. As a part
of the process to develop Ashland's estimates of future asbestos
costs, a range of long-term cost models is developed that assumes
a run-out of claims through 2055. 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. The total future litigation defense and
claim settlement costs on an undiscounted basis has been estimated
within a reasonably possible range of $400 million to $2.0
billion, depending on the number of years those costs extend and
other combinations of assumptions selected. Ashland's reserve
represents between 10 and 29 years of future costs, depending on
the model selected. If actual experience is worse than projected
relative to the number of claims filed, the severity of alleged
disease associated with those claims or costs incurred to resolve
those claims, Ashland may need to increase further the estimates
of the costs associated with asbestos claims and these increases
could potentially be material over time.
Ashland has insurance coverage for most of the litigation defense
and claim settlement costs incurred in connection with its
asbestos claims, and coverage-in-place agreements exist with the
insurance companies that provide substantially all of the coverage
currently being accessed. As a result, increases in the asbestos
reserve have been largely offset by probable insurance recoveries.
The amounts not recoverable generally are due from insurers that
are insolvent, rather than as a result of uninsured claims or the
exhaustion of Ashland's insurance coverage.
Ashland retained the services of Tillinghast-Towers Perrin to
assist management in the estimation of reasonably possible
insurance recoveries associated with Ashland's estimate of its
asbestos liabilities. Such recoveries are based on management's
assumptions and estimates surrounding the available or applicable
insurance coverage. One such assumption is that all solvent
insurance carriers remain solvent. Although coverage limits are
resolved in the coverage-in-place agreement with Equitas Limited
(Equitas) and other London companies, which collectively provide a
significant portion of Ashland's insurance coverage for asbestos
claims, there is a disagreement with these companies over the
timing of recoveries. The resolution of this disagreement could
have a material effect on the value of insurance recoveries from
those companies. In estimating the value of future recoveries,
Ashland has used the least favorable interpretation of this
agreement under which the ultimate recoveries are extended for
many years, resulting in a significant discount being applied to
value those recoveries. Ashland will continue to apply this
methodology until such time as the disagreement is resolved. On
July 21, 2004, Ashland filed a demand for arbitration to resolve
the dispute concerning the interpretation of this agreement.
11
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE G - LITIGATION, CLAIMS AND CONTINGENCIES (continued)
At December 31, 2004, Ashland's receivable for recoveries of
litigation defense and claim settlement costs from its insurers
amounted to $432 million, of which $66 million relates to costs
previously paid. Receivables from insurance companies amounted to
$435 million at September 30, 2004 and $433 million at December
31, 2003. About 35% of the estimated receivables from insurance
companies at December 31, 2004, are expected to be due from
Equitas and other London companies. Of the remainder,
approximately 90% is expected to come from companies or groups
that are rated A or higher by A. M. Best.
ENVIRONMENTAL PROCEEDINGS
Ashland is subject to various federal, state and local
environmental laws and regulations that require environmental
assessment or remediation efforts (collectively environmental
remediation) at multiple locations. At December 31, 2004, such
locations included 90 waste treatment or disposal sites where
Ashland has been identified as a potentially responsible party
under Superfund or similar state laws, approximately 130 current
and former operating facilities (including certain operating
facilities conveyed to MAP) and about 1,220 service station
properties. Ashland's reserves for environmental remediation
amounted to $155 million at December 31, 2004, compared to $152
million at September 30, 2004 and $173 million at December 31,
2003. Such amounts 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.
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. Ashland regularly adjusts its reserves as
environmental remediation continues. Environmental remediation
expense amounted to $7 million for the three months ended December
31, 2004, compared to $4 million for the three months ended
December 31, 2003, and annual expense of $2 million in 2004, $22
million in 2003 and $30 million in 2002.
No individual remediation location is material to Ashland, as its
largest reserve for any site is less than 10% of the remediation
reserve. As a result, Ashland's exposure to adverse developments
with respect to any individual site is not expected to be
material, and these sites are in various stages of ongoing
remediation. Although environmental remediation could have a
material effect on results of operations if a series of adverse
developments occurs in a particular quarter or fiscal year,
Ashland believes that the chance of such developments occurring in
the same quarter or fiscal year is remote.
OTHER LEGAL PROCEEDINGS
In addition to the matters described above, there are various
claims, lawsuits and administrative proceedings pending or
threatened against Ashland and its current and former
subsidiaries. Such actions are with respect 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
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
---------------------------------------------------------------------------------------------------------------
Three months ended
December 31
------------------------
(In millions) 2004 2003
---------------------------------------------------------------------------------------------------------------
REVENUES
Sales and operating revenues
APAC $ 611 $ 650
Ashland Distribution 895 698
Ashland Specialty Chemical 400 322
Valvoline 309 290
Intersegment sales
Ashland Distribution (6) (5)
Ashland Specialty Chemical (32) (19)
---------- -----------
2,177 1,936
Equity income
APAC 2 4
Ashland Specialty Chemical 2 2
Refining and Marketing 142 32
---------- -----------
146 38
Other income
APAC 1 4
Ashland Distribution 2 5
Ashland Specialty Chemical 9 2
Valvoline 2 1
Refining and Marketing 2 (1)
Corporate 1 2
---------- -----------
17 13
---------- -----------
$ 2,340 $ 1,987
========== ===========
OPERATING INCOME
APAC $ 7 $ 30
Ashland Distribution 24 13
Ashland Specialty Chemical 22 23
Valvoline 18 20
Refining and Marketing (1) 136 26
Corporate (27) (20)
---------- -----------
$ 180 $ 92
========== ===========
---------------------------------------------------------------------------------------------------------------
(1) Includes Ashland's equity income from MAP, amortization related to
Ashland's excess investment in MAP, and other activities associated
with refining and marketing.
13
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ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
INFORMATION BY INDUSTRY SEGMENT
----------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
------------------------
2004 2003
----------------------------------------------------------------------------------------------------------------------
OPERATING INFORMATION
APAC
Construction backlog at December 31 (millions) (1) $ 1,730 $ 1,659
Net construction job revenues (millions) (2) $ 344 $ 366
Hot-mix asphalt production (million tons) 7.8 8.4
Aggregate production (million tons) 7.8 6.8
Ashland Distribution (3)
Sales per shipping day (millions) $ 14.4 $ 11.3
Gross profit as a percent of sales 9.6% 9.6%
Ashland Specialty Chemical (3)
Sales per shipping day (millions) $ 6.4 $ 5.2
Gross profit as a percent of sales 24.2% 29.8%
Valvoline
Lubricant sales (million gallons) 41.1 43.7
Premium lubricants (percent of U.S. branded volumes) 21.8% 19.4%
Refining and Marketing (4)
Refinery runs (thousand barrels per day)
Crude oil refined 975 899
Other charge and blend stocks 200 184
Refined product yields (thousand barrels per day)
Gasoline 644 612
Distillates 328 296
Asphalt 81 68
Other 140 116
-------- --------
Total 1,193 1,092
Refined product sales (thousand barrels per day) (5) 1,414 1,355
Refining and wholesale marketing margin (per barrel) (6) $ 4.03 $ 1.71
Speedway SuperAmerica (SSA)
Retail outlets at December 31 1,669 1,775
Gasoline and distillate sales (million gallons) 793 806
Gross margin - gasoline and distillates (per gallon) $ .1219 $ .1145
Merchandise sales (millions) $ 581 $ 547
Merchandise margin (as a percent of sales) 24.9% 24.8%
----------------------------------------------------------------------------------------------------------------------
(1) Includes APAC's proportionate share of the backlog of unconsolidated
joint ventures.
(2) Total construction job revenues, less subcontract costs.
(3) Sales are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating expenses.
(4) Amounts represent 100% of MAP's operations, in which Ashland owns a
38% interest.
(5) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(6) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Ashland reported net income of $94 million for the quarter ended
December 31, 2004, compared to $34 million for the quarter ended
December 31, 2003. Ashland's income from continuing operations
amounted to $94 million for the quarter ended December 31, 2004,
compared to $39 million for the quarter ended December 31, 2003.
Results from discontinued operations, consisting of charges for
asbestos liabilities, accounted for the difference in net income
and income from continuing operations for the 2003 period.
Ashland's record income from continuing operations in the December
2004 quarter resulted primarily from the dramatic improvement from
refining and marketing. Results from Ashland's wholly-owned
divisions were mixed. Operating income from the Chemical Sector,
which consists of the Ashland Distribution, Ashland Specialty
Chemical, and Valvoline divisions, improved 14% compared to the
December 2003 quarter. However, operating income from the
Transportation Construction Sector, which consists of Ashland
Paving And Construction, Inc. (commercially known as APAC),
declined 77% reflecting adverse weather conditions, which reduced
working days, slowed production and increased costs. An analysis
of operating income by industry segment follows.
APAC
APAC reported operating income of $7 million for the December 2004
quarter, compared to $30 million for the December 2003 quarter.
APAC struggled with a persistent mix of wet and cold conditions
that started early in the quarter with Hurricane Jeanne. These
conditions adversely affected construction activity and increased
operating costs throughout the quarter. Net construction job
revenues (total construction job revenues, less subcontract costs)
decreased 6% from the prior year period. Production of hot-mix
asphalt decreased 7%, while liquid asphalt costs increased 9%.
Higher equipment and plant fuel costs contributed $4 million to
the decline in operating income. Equity income from APAC's joint
venture project at Atlanta's Hartsfield Airport declined $3
million as that project nears completion. On the positive side,
aggregate production, which is less affected by weather, increased
15%, due in part to the opening of a new quarry in Naples,
Florida. Construction backlog, or jobs awarded but not yet
completed, was $1.73 billion at December 31, 2004, up 4% from a
year ago. Included in the increase is an $80 million project in
Miami recently awarded to the Major Projects Group.
ASHLAND DISTRIBUTION
Ashland Distribution achieved all-time record operating income of
$24 million, up 85% over the $13 million reported for the quarter
a year ago. Sales volumes increased 5%, reflecting the division's
continued focus on consistent improvement in customer service and
on-time, accurate and complete product delivery. Gross profit as a
percent of sales remained constant at 9.6%, reflecting Ashland
Distribution's success in implementing price increases, enabling
the division to keep pace with higher raw material costs.
ASHLAND SPECIALTY CHEMICAL
Ashland Specialty Chemical reported operating income of $22
million for the December 2004 quarter, compared to $23 million for
the December 2003 quarter. The December 2004 quarter included
approximately $4 million in net, non-recurring gains principally
related to the termination of a product supply contract. Although
sales and operating revenues were up 24%, reflecting in part an 8%
increase in
15
------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
ASHLAND SPECIALTY CHEMICAL (CONTINUED)
sales volumes for the thermoset resins businesses, gross profit as
a percent of sales declined from 29.8% to 24.2%. Tightness in
certain petrochemical markets caused raw material costs to
escalate at a faster pace than could be recovered through
increased selling prices.
VALVOLINE
Operating income from the Valvoline division was $18 million in
the December 2004 quarter, compared to $20 million in the December
2003 quarter. While profits were down 10%, this was Valvoline's
second-best December quarter. Lubricant sales volumes were down 6%
due in part from shifts in the timing of promotional programs.
Results from Valvoline Instant Oil Change declined as the impact
of reduced car counts was only partially offset by increased
ticket prices. International results improved primarily due to
higher lubricant sales volumes from operations in Australia and
Asia.
REFINING AND MARKETING
Operating income from Refining and Marketing, which consists
primarily of equity income from Ashland's 38% ownership interest
in MAP, amounted to $136 million for the quarter ended December
31, 2004, compared to $26 million for the December 2003 quarter.
Equity income from MAP's refining and wholesale marketing
operations increased $102 million, reflecting strong refining
margins and falling crude oil prices during the December 2004
quarter. In addition, MAP was able to run more sour crudes during
the period, taking advantage of substantial discounts on these
feedstocks. MAP's refining and wholesale marketing margin
increased $2.32 per barrel and crude oil throughput increased 8%
compared to the prior year quarter. Equity income from MAP's
retail operations (Speedway SuperAmerica and a 50% interest in the
Pilot Travel Centers joint venture) increased $11 million, due to
the net effects of higher product and merchandise margins for SSA,
higher product volumes and margins and higher merchandise volumes
for PTC, partially offset by lower product volumes for SSA
reflecting fewer stores. During the December 2004 quarter, MAP
recognized a $15 million expense related to estimated future
obligations to make certain insurance premium payments related to
past loss experience, reducing Ashland's equity income by
approximately $6 million.
On March 19, 2004, Ashland announced the signing of an agreement
under which it would transfer its 38% interest in Marathon Ashland
Petroleum LLC ("MAP") and two wholly-owned businesses to Marathon
Oil Corporation ("Marathon") in a transaction structured to be
generally tax free and valued at approximately $3 billion. The two
businesses are Ashland's maleic anhydride business and 61
Valvoline Instant Oil Change centers. The transaction is subject
to several previously disclosed conditions, including approval by
Ashland's shareholders, consent from Ashland's public debt holders
and receipt of a favorable private letter ruling from the Internal
Revenue Service ("IRS") with respect to the tax treatment of the
transaction.
On December 20, 2004 and January 25, 2005, Ashland provided
updates on the status of the proposed transaction. The updates
included information about the status of the requested tax
rulings. Ashland and Marathon have continued their discussions
with the IRS and are discussing with the IRS modifications of the
proposed transaction that would allow a tax efficient transfer of
Ashland's interest in MAP to Marathon. These modifications would
require Ashland and Marathon to negotiate amendments to the Master
Agreement executed by Ashland and Marathon on March 18, 2004.
There can be no assurance that an agreement on a modified
transaction will be reached. If an agreement is reached on a
modified transaction, it is likely that the transaction would
close in the second calendar quarter of 2005.
16
------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
CORPORATE
Corporate expenses amounted to $27 million in the quarter ended
December 31, 2004, compared to $20 million in the December 2003
quarter. The increase reflects a $7 million charge in the December
2004 quarter for estimated future obligations to make certain
insurance premium payments related to past loss experience.
NET INTEREST AND OTHER FINANCIAL COSTS
Net interest and other financial costs amounted to $31 million in
the December 2004 quarter, compared to $30 million in the December
2003 quarter. The increase reflects a $2 million loss in the
December 2004 quarter on the early retirement of a capitalized
lease obligation, partially offset by reduced interest expense
reflecting the replacement of maturing long-term debt with
lower-rate, short-term borrowings.
DISCONTINUED OPERATIONS
As described in Notes B and G to the Condensed Consolidated
Financial Statements, Ashland's results from discontinued
operations include charges associated with estimated future
asbestos liabilities less probable insurance recoveries. Such
amounts are summarized below.
------------------------------------------------------------------------------------------------------------------------
Three months ended
December 31
-----------------------
(In millions) 2004 2003
------------------------------------------------------------------------------------------------------------------------
PRETAX LOSS FROM DISCONTINUED OPERATIONS
Reserves for asbestos-related litigation $ - $ (7)
INCOME TAXES
Reserves for asbestos-related litigation - 2
---------- ----------
RESULTS FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES) $ - $ (5)
========== ==========
FINANCIAL POSITION
LIQUIDITY
Cash flows from operations, a major source of Ashland's liquidity,
amounted to a deficit of $54 million for the three months ended
December 31, 2004, compared to positive cash flows of $68 million
for the three months ended December 31, 2003. Ashland received no
cash distributions from MAP in the 2004 period, compared to
distributions of $146 million in the 2003 period. Pursuant to the
terms of the agreement entered into between Ashland and Marathon,
MAP has not made its regular, quarterly cash distributions to
Ashland since December 31, 2003. The final amount received by
Ashland from the proposed transaction would be increased by an
amount equal to 38% of the cash accumulated from operations during
the period prior to closing. Ashland's share of excess cash at
December 31, 2004, was $591 million. If the proposed transaction
is terminated, MAP's cash distributions to Ashland and Marathon
would resume.
Ashland's financial position has enabled it to obtain capital for
its financing needs and to maintain investment grade ratings on
its senior debt of Baa2 from Moody's and BBB from Standard &
Poor's (S&P). In December 2004, S&P raised Ashland's commercial
paper rating to A-2 from A-3, increasing the availability of the
commercial paper market to Ashland. Moody's continues to rate
Ashland's commercial paper at P-3. Ashland has two revolving
credit agreements providing for up to $350 million in borrowings.
17
------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
LIQUIDITY (CONTINUED)
These revolving credit agreements were not used during the quarter
ended December 31, 2004. In the June 2004 quarter, Ashland
executed an additional $200 million revolving credit agreement
which expires March 31, 2005. Ashland has utilized this facility
to fund currently maturing long-term debt, the early retirement of
a capital lease, and certain other lease payments, and had $146
million outstanding under this facility at December 31, 2004.
While the revolving credit agreements contain covenants limiting
new borrowings based on Ashland's stockholders' equity, these
agreements would have permitted an additional $2.5 billion of
borrowings at December 31, 2004. Additional permissible borrowings
are increased (decreased) by 150% of any increase (decrease) in
stockholders' equity.
At December 31, 2004, working capital (excluding debt due within
one year) amounted to $831 million, compared to $926 million at
September 30, 2004, and $763 million at December 31, 2003.
Ashland's working capital is affected by its use of the LIFO
method of inventory valuation. That method valued inventories
below their replacement costs by $108 million at December 31,
2004, compared to $95 million at September 30, 2004, and $78
million at December 31, 2003. Liquid assets (cash, cash
equivalents and accounts receivable) amounted to 74% of current
liabilities at December 31, 2004, compared to 84% at September 30,
2004, and 94% at December 31, 2003.
CAPITAL RESOURCES
For the three months ended December 31, 2004, property additions
amounted to $55 million, compared to $53 million for the same
period last year. Ashland anticipates meeting its remaining 2005
capital requirements for property additions and dividends from
internally generated funds.
Ashland's debt level amounted to $1.66 billion at December 31,
2004, compared to $1.55 billion at September 30, 2004, and $1.57
billion at December 31, 2003. Debt as a percent of capital
employed amounted to 36.9% at December 31, 2004, compared to 36.4%
at September 30, 2004, and 40.4% at December 31, 2003. At December
31, 2004, Ashland's debt included $280 million of floating-rate
obligations, including $251 million of short-term debt and $29
million of long-term debt, and the interest rates on an additional
$158 million of fixed-rate, medium-term notes were effectively
converted to floating rates through interest rate swap agreements.
In addition, Ashland's costs under its sale of receivables program
and various operating leases are based on the floating-rate
interest costs on $237 million of third-party debt underlying
those transactions. As a result, Ashland was exposed to short-term
interest rate fluctuations on $675 million of debt obligations at
December 31, 2004.
ASBESTOS-RELATED LITIGATION AND ENVIRONMENTAL REMEDIATION
For a discussion of Ashland's asbestos-related litigation and
environmental remediation matters, see Note G to the Condensed
Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis contains forward-looking
statements, within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements include those that refer to Ashland's
operating performance, earnings and expectations about the MAP
transaction. Although Ashland believes its expectations are based
on reasonable assumptions, it cannot assure the expectations
reflected herein will be achieved. These forward-looking
statements are based upon internal forecasts and analyses of
current and future market conditions and trends, management
18
------------------------------------------------------------------------------
ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------------------------------------------------
plans and strategies, weather, operating efficiencies and economic
conditions, such as prices, supply and demand, cost of raw
materials, and legal proceedings and claims (including
environmental and asbestos matters) and are subject to a number of
risks, uncertainties, and assumptions that could cause actual
results to differ materially from those we describe in the
forward-looking statements. The risks, uncertainties, and
assumptions include the possibility that Ashland will be unable to
fully realize the benefits anticipated from the MAP transaction;
the possibility the transaction may not close including as a
result of failure to receive a favorable ruling from the Internal
Revenue Service or failure of Ashland to obtain the approval of
its shareholders; the possibility that Ashland may be required to
modify some aspect of the transaction to obtain regulatory
approvals; and other risks that are described from time to time in
the Securities and Exchange Commission (SEC) reports of Ashland.
Other factors and risks affecting Ashland are contained in Risks
and Uncertainties in Note A to the Consolidated Financial
Statements in Ashland's annual report on Form 10-K for the fiscal
year ended September 30, 2004. Ashland undertakes no obligation to
subsequently update or revise these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Ashland's market risk exposure at December 31, 2004 is generally
consistent with the types and amounts of market risk exposures
presented in Ashland's Annual Report on Form 10-K for the fiscal
year ended September 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly
report, Ashland, under the supervision and with the
participation of its management, including Ashland's
Chief Executive Officer and its Chief Financial Officer,
evaluated the effectiveness of Ashland's disclosure
controls and procedures pursuant to Rule 13a-15(b) and
15d-15(b) promulgated under the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures
were effective.
(b) There were no significant changes in Ashland's internal
control over financial reporting, or in other factors,
that occurred during the period covered by this quarterly
report that have materially affected, or are reasonably
likely to materially affect, Ashland's internal control
over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 1. 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.
The majority of lawsuits filed involve multiple plaintiffs and
multiple defendants, with the number of defendants in many cases exceeding
100. The monetary damages sought in the asbestos-related complaints that
have been filed in state or federal courts vary as a result of
jurisdictional requirements and practices, though the vast majority of
these complaints either do not specify monetary damages sought or merely
recite that the monetary damages sought meet or exceed the required
jurisdictional minimum in which the complaint was filed. Plaintiffs have
asserted specific dollar claims for damages in approximately 5% of the
49,500 active lawsuits pending as of December 31, 2004. In these active
lawsuits, less than 0.2% of the active lawsuits involve claims between $0
and $100,000; approximately 1.6% of the active lawsuits involve claims
between $100,000 and $1 million; less than 1% of the active lawsuits
involve claims between $1 million and $5 million; less than 0.2% of the
active lawsuits involve claims between $5 million and $10 million;
approximately 2% of the active lawsuits involve claims between $10 million
and $15 million; and less than 0.02% of the active lawsuits involve claims
between $15 million and $100 million. The variability of requested damages,
coupled with the actual experience of resolving claims over an extended
period, demonstrates that damages requested in any particular lawsuit or
complaint bear little or no relevance to the merits or disposition value of
a particular case. Rather, the amount potentially recoverable by a specific
plaintiff or group of plaintiffs is determined by other factors such as
product identification or lack thereof, the type and severity of the
disease alleged, the number and culpability of other defendants, the impact
of bankruptcies of other companies that are co-defendants in claims,
specific defenses available to certain defendants, other potential
causative factors and the specific jurisdiction in which the claim is made.
For additional information regarding liabilities arising from
asbestos-related litigation, see Note G of "Notes to Condensed Consolidated
Financial Statements" in this quarterly report on Form 10-Q.
U.S. Department of Justice ("USDOJ") Antitrust Division Investigation
- In November 2003, Ashland received a subpoena from the USDOJ relating to
a foundry resins grand jury investigation. Ashland has provided responsive
records to the subpoena. As is frequently the case when such investigations
are in progress, a number of civil actions have since been filed in
multiple jurisdictions, most of which are seeking class action status for
classes of customers of foundry resins. These cases have been consolidated
for pretrial purposes in the United States District Court, Southern
District of Ohio. Ashland will vigorously defend the actions.
Environmental Proceedings - (1) Under the federal Comprehensive
Environmental Response Compensation and Liability Act (as amended) and
similar state laws, Ashland 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 December 31, 2004, Ashland had been named
a PRP at 90 waste treatment or disposal sites. These sites are currently
subject to ongoing investigation and remedial activities, overseen by the
United States Environmental Protection Agency (the "USEPA") or a state
agency, in which Ashland 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.
For additional information regarding environmental matters and
reserves, see Note G of "Notes to Condensed Consolidated Financial
Statements" in this quarterly report on Form 10-Q.
(2) On May 13, 2002, Ashland entered into a plea agreement with the
U.S. Attorney's Office for the District of Minnesota and the U.S.
Department of Justice regarding a May 16, 1997, sewer fire at the St. Paul
Park, Minnesota refinery, which is now owned by MAP. As part of the plea
agreement, Ashland entered guilty pleas to two misdemeanors, paid a $3.5
million fine related to violations of the Clean Air Act ("CAA"), paid $3.55
million as restitution to the employees injured in the fire, and paid
$200,000 as restitution to the responding rescue units. Ashland also agreed
to complete certain upgrades to the St. Paul Park refinery's process
sewers, junction boxes and
20
drains to meet standards established by Subpart QQQ of the New Source
Performance Standards of the CAA (the "Refinery Upgrades"). The Refinery
Upgrades have been completed and documentation submitted for relevant
agency approval.
In addition, as part of the plea agreement, Ashland entered into a
deferred prosecution agreement, wherein prosecution of a separate count of
the indictment charging Ashland with violating Subpart QQQ was deferred for
four years. The deferred prosecution agreement provides that if Ashland
satisfies the terms and conditions of the plea agreement and completes the
Refinery Upgrades, the deferred prosecution agreement will terminate and
the United States will dismiss that count with prejudice. Ashland believes
that it has satisfied these terms and conditions and has filed a motion
with the court requesting that the deferred count be dismissed.
As part of its sentence, Ashland was placed on probation for five
years. The primary condition of probation is an obligation not to commit
future federal, state, or local crimes. If Ashland were to commit such a
crime, it would be subject not only to prosecution for that new violation,
but the government could also seek to revoke Ashland's probation. The
probation office has retained an independent environmental consultant to
review and monitor Ashland's compliance with applicable environmental
requirements and the terms and conditions of probation. The court also
included other customary terms and restrictions of probation in its
probation order.
(3) Pursuant to a 1988 Resource Conservation and Recovery Act
Administrative Consent Order ("Consent Order"), Ashland is remediating soil
and groundwater at a former chemical distribution facility site in Lansing,
Michigan. The USEPA has asserted that Ashland has not complied with certain
provisions of the Consent Order relating to interim remedial measures at
the site. Although Ashland disputed this assertion, Ashland and the USEPA
agreed to resolve the dispute prior to USEPA's filing of a formal
enforcement action. Ashland has paid a $650,000 penalty, and has signed a
Consent Agreement and Final Order ("CAFO") that reflects an agreement
between the parties as to what will constitute future compliance with the
disputed provisions of the original Consent Order. Ashland is continuing to
work with the USEPA to design and implement a final remedy at the site.
Once the final remedy is implemented, the CAFO will expire.
(4) In 1990, contamination of groundwater at Ashland's former Canton,
Ohio, refinery (now owned and operated by MAP) was first identified and
reported to Ohio's Environmental Protection Agency ("OEPA"). Since that
time, Ashland has voluntarily conducted investigation and remediation
activities and regularly communicated with OEPA regarding this matter.
Ashland and the state of Ohio have exchanged Consent Order drafts and have
met to negotiate the terms of such an order. The state filed a complaint in
February 2004, but simultaneously expressed an interest in continuing
Consent Order settlement discussions. Following the filing of the
complaint, Ashland, OEPA and Ohio's Office of the Attorney General have
continued to work to finalize a Consent Order. The state has advised that
it will assess a penalty as part of the overall settlement and has made an
initial request for $650,000.
Shareholder Derivative Litigation - On January 27, 2005, Ashland
reached a settlement with the plaintiff, Central Laborers' Pension Fund, in
the shareholder derivative lawsuit brought in August 2002 against certain
former and current directors and officers of Ashland. The Kenton County
Circuit Court in Kentucky approved the settlement on February 2, 2005.
In settling the action, Ashland has agreed to make certain
modifications to its corporate governance policies and procedures,
including heightening the standard for determining director independence
and requiring that two-thirds of Ashland's Board of Directors (the "Board")
be comprised of only independent directors. Further, Ashland has agreed to
solicit from its major shareholders director candidates and to nominate a
qualified candidate for election to the Board.
Other Legal Proceedings - In addition to the matters described above,
there are various claims, lawsuits and administrative proceedings pending
or threatened against Ashland and its current and former subsidiaries. Such
actions are with respect 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Ashland's Annual Meeting of Shareholders was held on January 27,
2005 at the Metropolitan Club, 50 E. RiverCenter Boulevard,
Covington, Kentucky at 10:30 a.m.
21
(b) Ashland's shareholders at said meeting elected three directors
(Bernadine P. Healy, Kathleen Ligocki and James J. O'Brien) to
serve a three-year term.
Votes
Affirmative Withheld
Bernadine P. Healy 61,392,760 1,555,683
Kathleen Ligocki 61,894,215 1,054,228
James J. O'Brien 58,850,547 4,097,896
Directors who continued in office: Roger W. Hale, Patrick F.
Noonan, George A. Schaefer, Jr., Ernest H. Drew, Mannie L.
Jackson, Theodore M. Solso, and Michael J. Ward.
(c) Ashland's shareholders at said meeting ratified the appointment of
Ernst & Young LLP as independent auditors for fiscal year 2005 by
a vote of 61,347,939 affirmative, to 999,111 negative and 601,193
abstention votes.
ITEM 5. OTHER INFORMATION
(a) Status of MAP Transaction - On March 19, 2004, Ashland announced
the signing of an agreement under which it would transfer its 38%
interest in MAP and two wholly-owned businesses to Marathon in a
transaction structured to be generally tax free and valued at
approximately $3 billion. The two businesses are Ashland's maleic
anhydride business and 61 Valvoline Instant Oil Change centers.
The transaction is subject to several previously disclosed
conditions, including approval by Ashland's shareholders, consent
from Ashland's public debt holders and receipt of a favorable
private letter ruling from the Internal Revenue Service ("IRS")
with respect to the tax treatment of the transaction.
On December 20, 2004 and January 25, 2005, Ashland provided
updates on the status of the proposed transaction. The updates
included information about the status of the requested tax
rulings. Ashland and Marathon have continued their discussions
with the IRS and are discussing with the IRS modifications of the
proposed transaction that would allow a tax efficient transfer of
Ashland's interest in MAP to Marathon. These modifications would
require Ashland and Marathon to negotiate amendments to the Master
Agreement executed by Ashland and Marathon on March 18, 2004.
There can be no assurance that an agreement on a modified
transaction will be reached. If an agreement is reached on a
modified transaction, it is likely that the transaction would
close in the second calendar quarter of 2005.
(b) Changes to Procedures by Which Security Holders May Recommend
Nominees to the Board of Directors - On February 2, 2005, the
Kenton County Circuit Court in Kentucky approved the settlement
reached by Ashland and the Central Laborers' Pension Fund of a
shareholder derivative lawsuit brought in August 2002. The
settlement provides, in relevant part, that shareholders owning 1%
or more of Ashland's common stock will be canvassed to solicit
qualified Board candidates who meet certain personal and
professional qualifications. The Governance and Nominating
Committee of Ashland's Board will consider such candidates and
work with the full Board to appoint one director candidate to the
Board.
ITEM 6. EXHIBITS
(a) Exhibits
10.1 Ashland Inc. Nonqualified Excess Benefit Pension Plan -
2003 Restatement, as amended.
10.2 Eleventh Amended and Restated Ashland Inc. Supplemental
Early Retirement Plan for Certain Employees, as amended.
10.3 Ashland Inc. Deferred Compensation Plan, as amended.
22
10.4 Ashland Inc. Deferred Compensation Plan for Employees
(2005).
10.5 Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors, as amended.
10.6 Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors (2005).
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certificate of James J. O'Brien, Chief Executive Officer
of Ashland pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350.
31.2 Certificate of J. Marvin Quin, Chief Financial Officer of
Ashland pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, U.S.C. Section 1350.
32 Certificate of James J. O'Brien, Chief Executive Officer
of Ashland, and J. Marvin Quin, Chief Financial Officer
of Ashland, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Ashland Inc.
------------------------------------
(Registrant)
Date: February 8, 2005 /s/ J. Marvin Quin
-------------------------------------
J. Marvin Quin
Senior Vice President and Chief Financial
Officer (on behalf of the Registrant and
as principal financial officer)
24
EXHIBIT INDEX
Exhibit
No. Description
------------ -------------------------------------------------------
10.1 Ashland Inc. Nonqualified Excess Benefit Pension Plan -
2003 Restatement, as amended.
10.2 Eleventh Amended and Restated Ashland Inc. Supplemental
Early Retirement Plan for Certain Employees, as amended.
10.3 Ashland Inc. Deferred Compensation Plan, as amended.
10.4 Ashland Inc. Deferred Compensation Plan for Employees
(2005).
10.5 Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors, as amended.
10.6 Ashland Inc. Deferred Compensation Plan for Non-Employee
Directors (2005).
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certificate of James J. O'Brien, Chief Executive Officer
of Ashland pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certificate of J. Marvin Quin, Chief Financial Officer of
Ashland pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certificate of James J. O'Brien, Chief Executive Officer
of Ashland, and J. Marvin Quin, Chief Financial Officer
of Ashland, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, U.S.C. Section 1350.
25