UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the quarterly period ended March 31, 2007
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the
transition period from _________ to ___________
Commission
file number 1-32532
ASHLAND
INC.
(a
Kentucky corporation)
I.R.S.
No. 20-0865835
50
E.
RiverCenter Boulevard
P.O.
Box
391
Covington,
Kentucky 41012-0391
Telephone
Number (859) 815-3333
Indicate
by check mark whether the
Registrant: (1) has filed all reports required to be filed by Section 13
or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes þ No
o
Indicate
by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
One):
Large
Accelerated Filer þ Accelerated
Filer o Non-Accelerated
Filer o
Indicate
by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No
þ
At
March 31, 2007, there were
62,774,541 shares of Registrant’s Common Stock outstanding.
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS
OF CONSOLIDATED INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
March
31
|
|
|
March
31
|
|
(In
millions except per share data - unaudited)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and operating revenues
|
|
$ |
1,915
|
|
|
$ |
1,786
|
|
|
$ |
3,717
|
|
|
$ |
3,472
|
|
Equity
income
|
|
|
3
|
|
|
|
2
|
|
|
|
6
|
|
|
|
4
|
|
Other
income
|
|
|
7
|
|
|
|
7
|
|
|
|
14
|
|
|
|
14
|
|
|
|
|
1,925
|
|
|
|
1,795
|
|
|
|
3,737
|
|
|
|
3,490
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
|
1,575
|
|
|
|
1,484
|
|
|
|
3,064
|
|
|
|
2,880
|
|
Selling,
general and administrative expenses (a)
|
|
|
309
|
|
|
|
262
|
|
|
|
574
|
|
|
|
515
|
|
|
|
|
1,884
|
|
|
|
1,746
|
|
|
|
3,638
|
|
|
|
3,395
|
|
OPERATING
INCOME
|
|
|
41
|
|
|
|
49
|
|
|
|
99
|
|
|
|
95
|
|
Loss
on the MAP Transaction (b)
|
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(2 |
) |
Net
interest and other financing income
|
|
|
9
|
|
|
|
9
|
|
|
|
25
|
|
|
|
20
|
|
INCOME
FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEFORE
INCOME TAXES
|
|
|
46
|
|
|
|
55
|
|
|
|
120
|
|
|
|
113
|
|
Income
taxes
|
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(36 |
) |
|
|
(29 |
) |
INCOME
FROM CONTINUING OPERATIONS
|
|
|
31
|
|
|
|
50
|
|
|
|
84
|
|
|
|
84
|
|
Income
(loss) from discontinued operations (net of income taxes) (c)
|
|
|
18
|
|
|
|
(1 |
) |
|
|
14
|
|
|
|
30
|
|
NET
INCOME
|
|
$ |
49
|
|
|
$ |
49
|
|
|
$ |
98
|
|
|
$ |
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE - Note H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
.49
|
|
|
$ |
.69
|
|
|
$ |
1.32
|
|
|
$ |
1.18
|
|
Income
(loss) from discontinued operations
|
|
|
.29
|
|
|
|
(.01 |
) |
|
|
.23
|
|
|
|
.42
|
|
Net
income
|
|
$ |
.78
|
|
|
$ |
.68
|
|
|
$ |
1.55
|
|
|
$ |
1.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE - Note H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
.49
|
|
|
$ |
.68
|
|
|
$ |
1.30
|
|
|
$ |
1.16
|
|
Income
(loss) from discontinued operations
|
|
|
.28
|
|
|
|
(.01 |
) |
|
|
.22
|
|
|
|
.41
|
|
Net
income
|
|
$ |
.77
|
|
|
$ |
.67
|
|
|
$ |
1.52
|
|
|
$ |
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PAID PER COMMON SHARE
|
|
$ |
.275
|
|
|
$ |
.275
|
|
|
$ |
.55
|
|
|
$ |
.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The
three and six months ended March 31, 2007 includes a $25 million
charge
for costs associated with Ashland’s voluntary severance
offer. See Note D of the Notes to Condensed Consolidated
Financial Statements for further
information.
|
(b)
|
“MAP
Transaction” refers to the June 30, 2005 transfer of Ashland’s 38%
interest in Marathon Ashland Petroleum LLC (MAP) and two other
businesses
to Marathon Oil Corporation. The loss for the periods presented
reflects adjustments in the recorded receivable for future estimated
tax
deductions related primarily to environmental and other postretirement
reserves.
|
(c)
|
The
three and six months ended March 31, 2007 includes income of $18
million
resulting from an increase in Ashland’s asbestos insurance
receivable. The prior periods primarily include after-tax
operating results of APAC (excluding previously allocated corporate
costs)
as a result of the sale of APAC to Oldcastle Materials, Inc. in
August
2006 for approximately $1.3
billion.
|
SEE
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31
|
|
|
September
30
|
|
|
March
31
|
|
(In
millions - unaudited)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
584
|
|
|
$ |
1,820
|
|
|
$ |
476
|
|
Available-for-sale
securities
|
|
|
371
|
|
|
|
349
|
|
|
|
621
|
|
Accounts
receivable
|
|
|
1,497
|
|
|
|
1,441
|
|
|
|
1,315
|
|
Allowance
for doubtful accounts
|
|
|
(49 |
) |
|
|
(40 |
) |
|
|
(36 |
) |
Inventories
- Note F
|
|
|
576
|
|
|
|
532
|
|
|
|
494
|
|
Deferred
income taxes
|
|
|
86
|
|
|
|
93
|
|
|
|
74
|
|
Other
current assets
|
|
|
79
|
|
|
|
55
|
|
|
|
86
|
|
Current
assets of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
439
|
|
|
|
|
3,144
|
|
|
|
4,250
|
|
|
|
3,469
|
|
INVESTMENTS
AND OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and other intangibles - Note G
|
|
|
375
|
|
|
|
310
|
|
|
|
230
|
|
Asbestos
insurance receivable (noncurrent portion)
|
|
|
449
|
|
|
|
444
|
|
|
|
345
|
|
Deferred
income taxes
|
|
|
194
|
|
|
|
186
|
|
|
|
231
|
|
Other
noncurrent assets
|
|
|
438
|
|
|
|
450
|
|
|
|
469
|
|
Noncurrent
assets of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
954
|
|
|
|
|
1,456
|
|
|
|
1,390
|
|
|
|
2,229
|
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
2,045
|
|
|
|
2,007
|
|
|
|
1,891
|
|
Accumulated
depreciation and amortization
|
|
|
(1,088 |
) |
|
|
(1,057 |
) |
|
|
(1,037 |
) |
|
|
|
957
|
|
|
|
950
|
|
|
|
854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,557
|
|
|
$ |
6,590
|
|
|
$ |
6,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
10
|
|
|
$ |
12
|
|
|
$ |
12
|
|
Trade
and other payables
|
|
|
1,143
|
|
|
|
1,302
|
|
|
|
1,083
|
|
Dividends
payable
|
|
|
-
|
|
|
|
674
|
|
|
|
-
|
|
Income
taxes
|
|
|
22
|
|
|
|
53
|
|
|
|
6
|
|
Current
liabilities of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
211
|
|
|
|
|
1,175
|
|
|
|
2,041
|
|
|
|
1,312
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (less current portion)
|
|
|
67
|
|
|
|
70
|
|
|
|
77
|
|
Employee
benefit obligations
|
|
|
318
|
|
|
|
313
|
|
|
|
404
|
|
Asbestos
litigation reserve (noncurrent portion)
|
|
|
569
|
|
|
|
585
|
|
|
|
500
|
|
Other
long-term liabilities and deferred credits
|
|
|
507
|
|
|
|
485
|
|
|
|
477
|
|
Noncurrent
liabilities of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
|
1,461
|
|
|
|
1,453
|
|
|
|
1,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
2,921
|
|
|
|
3,096
|
|
|
|
3,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,557
|
|
|
$ |
6,590
|
|
|
$ |
6,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEE
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS
OF CONSOLIDATED STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
|
|
|
(In
millions - unaudited)
|
|
stock
|
|
|
capital
|
|
|
earnings
|
|
|
loss
|
|
(a)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT SEPTEMBER 30, 2005
|
|
$ |
1
|
|
|
$ |
605
|
|
|
$ |
3,251
|
|
|
$ |
(118 |
) |
|
|
$ |
3,739
|
|
Total
comprehensive income (b)
|
|
|
|
|
|
|
|
|
|
|
114
|
|
|
|
(5 |
) |
|
|
|
109
|
|
Cash
dividends, $.55 per common share
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
(40 |
) |
Issued
506,569 common shares under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
incentive and other plans (c)
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Repurchase
of 2,402,030 common shares
|
|
|
|
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
(138 |
) |
BALANCE
AT MARCH 31, 2006
|
|
$ |
1
|
|
|
$ |
491
|
|
|
$ |
3,325
|
|
|
$ |
(123 |
) |
|
|
$ |
3,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT SEPTEMBER 30, 2006
|
|
$ |
1
|
|
|
$ |
240
|
|
|
$ |
2,899
|
|
|
$ |
(44 |
) |
|
|
$ |
3,096
|
|
Total
comprehensive income (b)
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
15
|
|
|
|
|
113
|
|
Cash
dividends, $.55 per common share
|
|
|
|
|
|
|
(1 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
|
(35 |
) |
Issued
629,375 common shares under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
incentive and other plans (c)
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Repurchase
of 4,712,000 common shares
|
|
|
|
|
|
|
(267 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
|
(288 |
) |
BALANCE
AT MARCH 31, 2007
|
|
$ |
1
|
|
|
$ |
7
|
|
|
$ |
2,942
|
|
|
$ |
(29 |
) |
|
|
$ |
2,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
At
March 31, 2007 and 2006, the accumulated other comprehensive loss
(after-tax) of $29 million for 2007 and $123 million for 2006 was
comprised of a minimum pension liability of $113 million for 2007
and $160
million for 2006, net unrealized translation gains of $85 million
for 2007
and $38 million for 2006, and net unrealized losses on cash flow
hedges of
$1 million for 2007 and $1 million for
2006.
|
(b)
|
Reconciliations
of net income to total comprehensive income
follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
March
31
|
|
|
March
31
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
49
|
|
|
$ |
49
|
|
|
$ |
98
|
|
|
$ |
114
|
|
Unrealized
translation gains (losses)
|
|
|
4
|
|
|
|
6
|
|
|
|
13
|
|
|
|
(5 |
) |
Related
tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Net
unrealized gains on cash flow hedges
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
Net
unrealized losses on available-for-sale securities
|
|
|
-
|
|
|
|
(1 |
) |
|
|
-
|
|
|
|
-
|
|
Total
comprehensive income
|
|
$ |
53
|
|
|
$ |
55
|
|
|
$ |
113
|
|
|
$ |
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
Includes
income tax benefits resulting from the exercise of stock options
of $11
million and $4 million for the six months ended March 31, 2007
and 2006,
respectively. |
SEE
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS
OF CONDENSED CONSOLIDATED CASH FLOWS
|
|
|
|
|
|
Six
months ended
March 31
|
|
(In
millions - unaudited)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES FROM CONTINUING
OPERATIONS
|
|
|
|
|
|
|
Net
Income
|
|
$ |
98
|
|
|
$ |
114
|
|
Income
from discontinued operations (net of income taxes)
|
|
|
(14 |
) |
|
|
(30 |
)
|
Adjustments
to reconcile income from continuing operations to cash flows from
operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
57
|
|
|
|
52
|
|
Deferred
income taxes
|
|
|
(1 |
) |
|
|
22
|
|
Equity
income from affiliates
|
|
|
(6 |
) |
|
|
(4 |
) |
Distributions
from equity affiliates
|
|
|
3
|
|
|
|
2
|
|
Loss
on the MAP Transaction
|
|
|
4
|
|
|
|
2
|
|
Change
in operating assets and liabilities (a)
|
|
|
(223 |
) |
|
|
(310 |
) |
Other
items
|
|
|
(1 |
) |
|
|
-
|
|
|
|
|
(83 |
) |
|
|
(152 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING
OPERATIONS
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
17
|
|
|
|
14
|
|
Excess
tax benefits related to share-based payments
|
|
|
8
|
|
|
|
4
|
|
Repayment
of long-term debt
|
|
|
(5 |
) |
|
|
(5 |
) |
Repurchase
of common stock
|
|
|
(288 |
) |
|
|
(138 |
) |
Cash
dividends paid
|
|
|
(709 |
) |
|
|
(40 |
) |
|
|
|
(977 |
) |
|
|
(165 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING
OPERATIONS
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(66 |
) |
|
|
(75 |
) |
Purchase
of operations - net of cash acquired
|
|
|
(73 |
) |
|
|
(3 |
) |
Proceeds
from sale of operations
|
|
|
1
|
|
|
|
1
|
|
Purchases
of available-for-sale securities
|
|
|
(306 |
) |
|
|
(549 |
) |
Proceeds
from sales and maturities of available-for-sale securities
|
|
|
286
|
|
|
|
337
|
|
Other
- net
|
|
|
12
|
|
|
|
1
|
|
|
|
|
(146 |
) |
|
|
(288 |
) |
CASH
USED BY CONTINUING OPERATIONS
|
|
|
(1,206 |
) |
|
|
(605 |
) |
Cash
provided (used) by discontinued operations
|
|
|
|
|
|
|
|
|
Operating
cash flows
|
|
|
(2 |
) |
|
|
132
|
|
Investing
cash flows
|
|
|
(28 |
) |
|
|
(36 |
) |
DECREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
(1,236 |
) |
|
|
(509 |
) |
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
1,820
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$ |
584
|
|
|
$ |
476
|
|
|
|
|
|
|
|
|
|
|
(a) |
Excludes
changes resulting from operations acquired or
sold. |
SEE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A – BASIS OF
PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim
financial reporting and Securities and Exchange Commission
regulations. In the opinion of management all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation
have
been included. These condensed consolidated financial statements
should be read in conjunction with Ashland’s Annual Report on Form 10-K for
the fiscal year ended September 30, 2006. Results of operations for
the period ended March 31, 2007, are not necessarily indicative of results
to be expected for the year ending September 30, 2007. Certain
prior period data has been reclassified in the condensed consolidated financial
statements and accompanying footnotes to conform to current period
presentation.
On
August
28, 2006, Ashland completed the sale of the stock of its wholly owned
subsidiary, Ashland Paving And Construction, Inc. (APAC), to Oldcastle
Materials, Inc. (Oldcastle). The operating results and assets and
liabilities related to APAC have been reflected as discontinued operations
in
the condensed consolidated financial statements for all periods
presented. Unless otherwise noted, amounts in these Notes to
Condensed Consolidated Financial Statements exclude amounts attributable
to
discontinued operations.
In
June
2006, Ashland redefined its reportable business segments as it continues
to
evolve into a diversified, global chemical company. Performance
Materials and Water Technologies, formerly combined under Ashland Specialty
Chemical, have now been separately disclosed since these businesses serve
different markets and recent acquisitions have made Water Technologies a
much
larger and more distinct part of Ashland. Performance Materials
includes three related business groups: Composite Polymers, Casting
Solutions, and Specialty Polymers and Adhesives. Water Technologies
also includes three related business groups: Drew Industrial, Drew
Marine, and Environmental and Process Solutions (which is the business acquired
from Degussa AG in May 2006). Disclosing Performance Materials and
Water Technologies separately provides greater visibility to Ashland’s strategy
of expanding its products, services and geographical reach in key market
segments where it competes. For further information on this revised
disclosure see “Information by Industry Segment” immediately following the Notes
to Condensed Consolidated Financial Statements on pages 16 and 17 of this
document. Prior periods have been conformed to the current period
presentation.
The
preparation of Ashland’s condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
of
assets, liabilities, revenues and expenses, and the disclosures of contingent
assets and liabilities. Significant items that are subject to such
estimates and assumptions include but are not limited to long-lived assets,
employee benefit obligations, income taxes, reserves and associated receivables
for asbestos litigation and environmental remediation. Although
management bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, actual
results could differ significantly from the estimates under different
assumptions or conditions.
NOTE
B – NEW ACCOUNTING STANDARDS
In
June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” an interpretation of
FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48
prescribes a minimum recognition threshold and measurement attribute for
the
financial statement recognition of a tax position taken or expected to be
taken
in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition for tax related positions. FIN 48 becomes
effective for Ashland on October 1, 2007. Ashland is currently
in the process of determining the effect, if any, the adoption of FIN 48
will
have on the consolidated financial statements.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
B – NEW ACCOUNTING STANDARDS (continued)
In
September 2006, the FASB issued Financial Accounting Standard No. 157
(FAS 157), “Fair Value Measurements,” which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit
fair value measurements since the FASB has previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute. FAS 157 becomes effective for Ashland on October 1,
2008. Ashland is currently in the process of determining the effect,
if any, the adoption of FAS 157 will have on the consolidated financial
statements.
In
September 2006, the FASB issued Financial Accounting Standard No. 158 (FAS
158),
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans,” which requires an employer to recognize the overfunded or
underfunded status of a defined benefit pension or other postretirement plan
(other than a multiemployer plan) as an asset or liability in its Consolidated
Balance Sheet and to recognize changes in that funded status in the year
in
which the changes occur through accumulated other comprehensive income, which
is
a component of stockholders’ equity. FAS 158 also requires additional
disclosures in the notes to the consolidated financial statements about certain
effects on net periodic benefit costs for the next fiscal year that arise
from
delayed recognition of the gains or losses, prior service costs or credits,
and
transition asset or obligation. FAS 158 is effective for
Ashland on September 30, 2007 and will not have an impact on the
Statement of Consolidated Income, but will affect Ashland’s Consolidated Balance
Sheet. If Ashland had adopted this statement as of September 30,
2006, it would have increased accrued benefit liabilities by $117 million
with a
corresponding deferred tax asset increase of $46 million and an additional
reduction in accumulated other comprehensive income of
$71 million.
NOTE
C – DISCONTINUED OPERATIONS
As
described in Note D of Ashland’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006, Ashland completed the sale of the stock of its
wholly
owned subsidiary, APAC, to Oldcastle on August 28, 2006. The sale
price of $1.30 billion was subject to adjustments for changes in working
capital
and certain other accounts from September 30, 2005, until the closing
date. Oldcastle paid $34 million at closing as a preliminary estimate
of the working capital adjustment that was subsequently calculated at
$7 million. During the December 2006 quarter, Ashland repaid $25
million of the estimated purchase price adjustment to Oldcastle. Per
the agreement, Oldcastle had a defined period of time to review this working
capital calculation, which was completed in the March 2007
quarter. As a result, Ashland repaid the remaining $2 million
purchase price adjustment, which completed the sale. The total gain
on the sale of APAC recorded in the September 2006 quarter, including a pension
and other postretirement curtailment gain, amounted to $162 million pretax
and
$110 million after-tax. The post-closing adjustments made during the
six months ended March 31, 2007 adjusted the total gain on sale of APAC to
$162
million pretax and $105 million after-tax.
Ashland’s
Board of Directors authorized that substantially all of the $1.23 billion
after-tax proceeds of the sale of APAC be distributed to the shareholders
of
Ashland by funding the completion of the then existing share repurchase
authorization, an additional repurchase authorization and a one time special
dividend. For further information on the special dividend and share
repurchase programs see Note J – Capital Stock.
APAC
qualifies as discontinued operations under FASB Statement No. 144
(FAS 144), “Accounting for the Impairment or Disposal of Long-Lived
Assets.” Accordingly, the operating results, net of tax, and assets
and liabilities of discontinued operations are presented separately in Ashland’s
condensed consolidated financial statements and the notes to condensed
consolidated financial statements have been adjusted to reflect discontinued
operations. The amounts eliminated from continuing operations did not
include allocations of corporate expenses to APAC included in the selling,
general and administrative expenses caption in the Statements of Consolidated
Income and the combined 39% U.S. federal (35%) and
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
C – DISCONTINUED OPERATIONS (continued)
state
(4%, net of federal deductions) statutory income tax benefits related to
such expenses. These corporate expenses were $12 million for the
March 2006 quarter and $22 million for the six months ended March 31,
2006. In accordance with a consensus of the Emerging Issues Task
Force (EITF 87-24), allocations of general corporate overhead may not be
allocated to discontinued operations for financial statement
presentation.
Components
of amounts in the Statements of Consolidated Income related to discontinued
operations are presented in the following table for the three and six months
ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31
|
|
|
Six
months ended March 31
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues
from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC
|
|
$ |
-
|
|
|
$ |
505
|
|
|
$ |
-
|
|
|
$ |
1,238
|
|
Income
(loss) from discontinued operations (net of income
taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC
|
|
|
-
|
|
|
|
(1 |
) |
|
|
-
|
|
|
|
31
|
|
Asbestos-related
litigation reserves and expenses
|
|
|
18
|
|
|
|
-
|
|
|
|
18
|
|
|
|
(1 |
) |
Loss
on disposal of discontinued operations (net of income
taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC
|
|
|
-
|
|
|
|
-
|
|
|
|
(4 |
) |
|
|
-
|
|
NOTE
D – ACQUISITIONS AND DIVESTITURES
Acquisitions
In
December 2006, Ashland acquired Northwest Coatings of Oak Creek, Wisconsin,
a formulator and manufacturer of adhesives and coatings employing ultraviolet
and electron beam (UV/EB) polymerization technologies from Caltius Equity
Partners. The transaction, which includes production facilities in
Milwaukee, Wisconsin and Greensboro, North Carolina, was valued at $74 million.
At the time this purchase transaction was announced, Northwest Coatings
had trailing twelve month sales of approximately $40 million. The
results of Northwest Coatings are included in the Statement of Consolidated
Income from the date of acquisition within the Performance Materials business
segment.
In
May
2006, Ashland acquired the water treatment business of Degussa AG (Degussa),
branded under the Stockhausen name, with five manufacturing facilities operating
in Germany, China, Brazil, Russia and the United States. The
acquisition allows Ashland’s Water Technologies segment to expand its technology
base, product line and service levels while continuing to develop its presence
in key emerging international markets. For its fiscal year ended
December 31, 2005, Degussa reported sales and operating revenues (translated
to
U.S. dollars) of $258 million and operating income of
$10 million. The transaction, denominated in Euros, was valued
at $162 million at the exchange rate on the acquisition
date. For further information on the purchase price allocation of
this transaction see Note L in Ashland’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2006.
Divestitures
On
August
28, 2006, Ashland completed the sale of the stock of its wholly owned
subsidiary, APAC, to Oldcastle. The operating results and assets and
liabilities related to APAC have been reflected as discontinued operations
in
the condensed consolidated financial statements for all periods presented.
For further information on this transaction see Note C – Discontinued
Operations.
As
a
result of the APAC divestiture certain identified remaining corporate costs
that
had been previously allocated to this business needed to be eliminated to
maintain Ashland’s overall competitiveness. Consequently, Ashland
offered an enhanced early retirement or voluntary severance opportunity
to
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
D – ACQUISITIONS AND DIVESTITURES (continued)
administrative
and corporate employees. In total, Ashland accepted voluntary
severance offers from 172 employees under the program. As a result, a
$25 million pretax charge was recorded for severance, pension and other
postretirement benefit costs, of which $5 million was paid, during the March
2007 quarter. This cost is classified in the selling, general and
administrative expenses caption of the Statements of Consolidated Income
and
grouped within “unallocated and other” for segment presentation
purposes. The termination dates for employees participating in the
program will continue to occur over the next several quarters with the last
expected to occur by the end of the quarter ending December 31,
2007. As of March 31, 2007, the liability related to curtailment
was $6 million and the remaining severance liability was
$14 million.
NOTE
E – DEBT
In
April
2007 Ashland replaced its revolving credit agreement with a new five year
revolving credit facility which provides for up to $300 million in
borrowings. Up to an additional $100 million in borrowings is
available with the consent of one or more of the lenders. The
borrowing capacity under this new facility would have been reduced by $105
million for letters of credit outstanding under the credit agreement at March
31, 2007. The revolving credit agreement contains a covenant limiting
the total debt Ashland may incur from all sources as a function of Ashland’s
stockholders’ equity. The covenant’s terms would have permitted
Ashland to borrow $4.3 billion at March 31, 2007, in addition to the actual
total debt incurred at that time. Permissible total Ashland debt
under the covenant’s terms increases (or decreases) by 150% of any increase (or
decrease) in stockholders’ equity.
During
the December 2005 quarter Ashland entered into an in-substance defeasance
of
approximately $49 million to repay current and long-term debt that had a
carrying value of $44 million on the balance sheet as of December 31,
2005. Because the transaction was not a legal defeasance the
investment has been placed into a trust and will be exclusively restricted
to
future obligations and repayments related to these debt
instruments. The investments have been classified on the balance
sheet as other current assets or other noncurrent assets based on the
contractual debt repayment schedule. The carrying value of the
investments to defease debt, including other defeasements that previously
occurred, at March 31, 2007 was $45 million, at September 30,
2006 was $51 million and at March 31, 2006 was
$57 million. The carrying value of the debt at March 31,
2007 was $39 million, at September 30, 2006 was $44 million and
at March 31, 2006 was $49 million.
NOTE
F – INVENTORIES
Inventories
are carried at the lower of cost or market. Certain chemicals,
plastics and lubricants are valued at cost using the last-in, first-out (LIFO)
method. The remaining inventories are stated at cost using the
first-in, first-out (FIFO) method or average cost method (which approximates
FIFO). The following table summarizes Ashland’s inventories as of the
reported Condensed Consolidated Balance Sheet dates.
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
September
30
|
|
|
March
31
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Chemicals
and plastics
|
|
$ |
568
|
|
|
$ |
540
|
|
|
$ |
486
|
|
Lubricants
|
|
|
89
|
|
|
|
84
|
|
|
|
88
|
|
Other
products and supplies
|
|
|
60
|
|
|
|
55
|
|
|
|
60
|
|
Excess
of replacement costs over LIFO carrying values
|
|
|
(141 |
) |
|
|
(147 |
) |
|
|
(140 |
) |
|
|
$ |
576
|
|
|
$ |
532
|
|
|
$ |
494
|
|
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
G – GOODWILL AND OTHER INTANGIBLES
In
accordance with FASB Statement No. 142 (FAS 142), “Goodwill and Other
Intangible Assets,” Ashland conducts an annual review for
impairment. Impairment is to be examined more frequently if certain
indicators are encountered. In accordance with FAS 142, Ashland
reviewed goodwill for impairment based on reporting units, which are defined
as
operating segments or groupings of businesses one level below the operating
segment level. Ashland has completed its most recent annual goodwill
impairment test required by FAS 142 as of July 1, 2006 and has
determined that no impairment exists. The following is a progression
of goodwill by segment for the six months ended March 31,
2007. There was no significant goodwill activity for the six months
ended March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
|
|
|
|
|
|
|
|
|
Water
|
|
|
|
(In
millions)
|
|
Materials
|
|
|
Distribution
|
|
|
Valvoline
|
|
|
Technologies
|
|
|
Total
|
Balance
at September 30, 2006
|
|
$ |
110
|
|
|
$ |
1
|
|
|
$ |
29
|
|
|
$ |
70
|
|
|
$ |
210
|
Acquisitions
|
|
|
49
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(1 |
) |
|
|
49
|
Currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
Balance
at March 31, 2007
|
|
$ |
159
|
|
|
$ |
1
|
|
|
$ |
30
|
|
|
$ |
70
|
|
|
$ |
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets consist of trademarks and trade names, patents and licenses, non-compete
agreements, sale contracts, customer lists and intellectual
property. Intangibles are amortized on a straight-line basis over
their estimated useful lives. The cost of trademarks and trade names
is amortized principally over 15 to 25 years, intellectual property over
5 to 17
years and other intangibles over 3 to 30 years. Ashland reviews
intangible assets for possible impairment whenever events or changes in
circumstances indicate that carrying amounts may not be
recoverable. Intangible assets were comprised of the following as of
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
(In
millions)
|
|
amount
|
|
|
amortization
|
|
|
amount
|
|
|
amount
|
|
|
amortization
|
|
|
amount
|
Trademarks
and trade names
|
|
$ |
65
|
|
|
$ |
(20 |
) |
|
$ |
45
|
|
|
$ |
54
|
|
|
$ |
(19 |
) |
|
$ |
35
|
Intellectual
property
|
|
|
40
|
|
|
|
(7 |
) |
|
|
33
|
|
|
|
19
|
|
|
|
(4 |
) |
|
|
15
|
Other
intangibles
|
|
|
49
|
|
|
|
(12 |
) |
|
|
37
|
|
|
|
23
|
|
|
|
(7 |
) |
|
|
16
|
Total
intangible assets
|
|
$ |
154
|
|
|
$ |
(39 |
) |
|
$ |
115
|
|
|
$ |
96
|
|
|
$ |
(30 |
) |
|
$ |
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense recognized on intangible assets for the six months ended March 31
was $4 million for 2007 and $5 million for 2006. As of
March 31, 2007, all of Ashland’s intangible assets that had a carrying
value were being amortized except for certain trademarks and trade names
that
currently have been determined to have indefinite lives. These assets
had a balance of $32 million as of March 31, 2007 and $23 million
as of March 31, 2006. In accordance with FAS 142, Ashland
annually reviews these assets to determine whether events and circumstances
continue to support the indefinite useful life. Estimated
amortization expense for future periods is $11 million in 2007 (includes
six months actual and six months estimated), $11 million in 2008,
$10 million in 2009, $8 million in 2010 and $8 million in
2011.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
H – EARNINGS PER
SHARE
Following
is the computation of basic and diluted earnings per share (EPS) from continuing
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31
|
|
|
Six
months ended March 31
|
|
(In
millions except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted EPS – Income
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
$ |
31
|
|
|
$ |
50
|
|
|
$ |
84
|
|
|
$ |
84
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic EPS – Weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shares outstanding
|
|
|
63
|
|
|
|
71
|
|
|
|
63
|
|
|
|
72
|
|
Common
shares issuable upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
stock appreciation rights
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Denominator
for diluted EPS – Adjusted weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
shares and assumed conversions
|
|
|
64
|
|
|
|
72
|
|
|
|
64
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.49
|
|
|
$ |
.69
|
|
|
$ |
1.32
|
|
|
$ |
1.18
|
|
Diluted
|
|
$ |
.49
|
|
|
$ |
.68
|
|
|
$ |
1.30
|
|
|
$ |
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
I – EMPLOYEE BENEFIT PLANS
Presently,
Ashland anticipates contributing $50 million to its U.S. pension plans and
$7
million to its non-U.S. pension plans during fiscal 2007. As of
March 31, 2007, contributions of $20 million have been made to the
U.S. plans and $2 million to the non-U.S. plans. The following
table details the components of pension and other postretirement benefit
costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
benefits
|
|
Other
postretirement benefits
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Three
months ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
10
|
|
|
$ |
15
|
|
|
$ |
1
|
|
|
$ |
2
|
|
Interest
cost
|
|
|
24
|
|
|
|
20
|
|
|
|
3
|
|
|
|
4
|
|
Expected
return on plan assets
|
|
|
(27 |
) |
|
|
(24 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service credit
|
|
|
-
|
|
|
|
-
|
|
|
|
(1 |
) |
|
|
(2 |
) |
Amortization
of net actuarial loss
|
|
|
7
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$ |
14
|
|
|
$ |
21
|
|
|
$ |
3
|
|
|
$ |
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
19
|
|
|
$ |
30
|
|
|
$ |
2
|
|
|
$ |
4
|
|
Interest
cost
|
|
|
43
|
|
|
|
41
|
|
|
|
6
|
|
|
|
7
|
|
Expected
return on plan assets
|
|
|
(48 |
) |
|
|
(50 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of prior service credit
|
|
|
-
|
|
|
|
-
|
|
|
|
(2 |
) |
|
|
(5 |
) |
Amortization
of net actuarial loss
|
|
|
12
|
|
|
|
21
|
|
|
|
-
|
|
|
|
1
|
|
|
|
$ |
26
|
|
|
$ |
42
|
|
|
$ |
6
|
|
|
$ |
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASHLAND
INC. AND CONSOLIDATED
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
J – CAPITAL STOCK
On
September 14, 2006, Ashland’s Board of Directors authorized the
distribution of a substantial portion of the proceeds of the sale of APAC
to the
Ashland Common Stock shareholders as a one-time special
dividend. Each shareholder of record as of October 10, 2006, received
$10.20 per share, for a total of $674 million. This amount was
accrued as dividends payable in the Condensed Consolidated Balance Sheet
at
September 30, 2006 and subsequently paid in the December 2006
quarter. Substantially all of the remaining after-tax proceeds were
directed to be used to repurchase Ashland Common Stock in accordance with
the
terms authorized by Ashland’s Board of Directors and as further described
below.
The
stock
repurchases were made pursuant to two different programs authorized by Ashland’s
Board of Directors. The first program, originally approved on July
21, 2005, authorized the purchase of $270 million of Ashland common stock
in the
open market. After 3.5 million shares at a cost of $196 million had
been purchased under the initial authorization, on January 25, 2006, Ashland’s
Board of Directors increased the remaining authorization by $176 million
to $250
million. As of September 14, 2006, Ashland had completed all
repurchases to be made under this program.
The
second program was authorized by Ashland’s Board of Directors on September 14,
2006, employing the remaining after-tax proceeds from the sale of APAC to
repurchase up to an additional 7 million shares. To facilitate this
repurchase program, Ashland entered into a stock trading plan with Credit
Suisse
Securities (USA) LLC (Credit Suisse). The stock trading plan, amended
and restated on September 20, 2006, allowed Credit Suisse to make daily
repurchases of stock starting on October 2, 2006, in accordance with the
instructions set forth in the filed plan and within the safe harbor from
insider
trading liability provided under Exchange Act Rule 10b5-1.
Ashland
repurchased 4.7 million shares for $288 million for the six months ended
March 31, 2007 and 2.4 million shares for $138 million for the six
months ended March 31, 2006. Since the inception of the first
described share repurchase program on July 21, 2005, through the completion
of
the second share repurchase program on December 19, 2006, Ashland repurchased
a
total of 13.2 million shares at a cost of $793 million. These
repurchases represent approximately 18% of shares outstanding on June 30,
2005. The stock repurchase actions are consistent with certain
representations of intent made to the Internal Revenue Service with respect
to
the transfer of MAP.
NOTE
K – 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.
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.
ASHLAND
INC. AND CONSOLIDATED
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended March 31
|
|
|
Years
ended September 30
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Open
claims - beginning of period
|
|
|
162
|
|
|
|
184
|
|
|
|
184
|
|
|
|
196
|
|
|
|
198
|
|
New
claims filed
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
|
|
12
|
|
|
|
29
|
|
Claims
settled
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(7 |
) |
Claims
dismissed
|
|
|
(19 |
) |
|
|
(11 |
) |
|
|
(25 |
) |
|
|
(18 |
) |
|
|
(24 |
) |
Open
claims - end of period
|
|
|
145
|
|
|
|
174
|
|
|
|
162
|
|
|
|
184
|
|
|
|
196
|
|
Since
October 1, 2003, Riley has been dismissed as a defendant in 83% of the resolved
claims. Amounts spent on litigation defense and claim settlements
averaged $812 per claim resolved in the six months ended March 31, 2007,
compared to $1,594 in the six months ended March 31, 2006, and annual
averages of $1,428 in 2006, $1,985 in 2005 and $1,655 in 2004. A
progression of activity in the asbestos reserve is presented in the following
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended March 31
|
|
|
Years
ended September 30
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Asbestos
reserve - beginning of period
|
|
$ |
635
|
|
|
$ |
571
|
|
|
$ |
571
|
|
|
$ |
618
|
|
|
$ |
610
|
|
Expense
incurred
|
|
|
-
|
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
|
59
|
|
Amounts
paid
|
|
|
(16 |
) |
|
|
(21 |
) |
|
|
(40 |
) |
|
|
(47 |
) |
|
|
(51 |
) |
Asbestos
reserve - end of period
|
|
$ |
619
|
|
|
$ |
550
|
|
|
$ |
635
|
|
|
$ |
571
|
|
|
$ |
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ashland
retained Hamilton, Rabinovitz & Alschuler, Inc. (HR&A) to assist in
developing and periodically updating independent and accurate reserve estimates
for future asbestos claims and related costs given various
assumptions. The methodology used by HR&A to project future
asbestos costs is based largely on Ashland’s recent experience, including
claim-filing and settlement rates, disease mix, enacted legislation, open
claims, and litigation defense and claim settlement costs. Ashland’s
claim experience is compared to the results of previously conducted
epidemiological studies estimating the number of people likely to develop
asbestos-related diseases. Those studies were undertaken in
connection with national analyses of the population expected to have been
exposed to asbestos. Using that information, HR&A estimates a
range of the number of future claims that may be filed, as well as the related
costs that may be incurred in resolving those claims.
From
the
range of estimates, Ashland records the amount it believes to be the best
estimate of future payments for litigation defense and claim settlement
costs. During the most recent update of this estimate completed
during the June 2006 quarter, it was determined that the reserves for asbestos
claims should be increased by $104 million. This increase in the
reserves was based on the results of a non-inflated, non-discounted 51-year
model developed with the assistance of HR&A. This increase
resulted in total reserves for asbestos claims of $619 million at
March 31, 2007, compared to $635 million at September 30, 2006 and
$550 million at March 31, 2006.
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
ASHLAND
INC. AND CONSOLIDATED
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
judicial
standards. Furthermore, any predictions with respect to these
variables are subject to even greater uncertainty as the projection period
lengthens. In light of these inherent uncertainties, Ashland believes
its asbestos reserve represents the best estimate within a range of possible
outcomes. As a part of the process to develop Ashland’s estimates of
future asbestos costs, a range of long-term cost models is
developed. These models are based on national studies that predict
the number of people likely to develop asbestos-related diseases and are
heavily
influenced by assumptions regarding long-term inflation rates for indemnity
payments and legal defense costs, as well as other variables mentioned
previously. Ashland has estimated that it is reasonably possible that
total future litigation defense and claim settlement costs on an inflated
and
undiscounted basis could range as high as approximately $1.9 billion, depending
on the combination of assumptions selected in the various models. If
actual experience is worse than projected relative to the number of claims
filed, the severity of alleged disease associated with those claims or costs
incurred to resolve those claims, Ashland may need to increase further the
estimates of the costs associated with asbestos claims and these increases
could
potentially be material over time.
Ashland
has insurance coverage for most of the litigation defense and claim settlement
costs incurred in connection with its asbestos claims, and coverage-in-place
agreements exist with the insurance companies that provide 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 has estimated the value
of probable 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.
Equitas
Limited (Equitas) and other London companies collectively provide a significant
portion of Ashland’s insurance coverage for asbestos claims. Ashland
discounts a substantial portion of these receivables based upon the projected
timing of the receipt of cash. On March 27, 2007, Equitas announced
that it had completed the first phase of a transaction previously announced
on
October 20, 2006, under which it has purchased reinsurance for all of its
coverage obligations from National Indemnity Corporation (National Indemnity),
a
member of the Berkshire Hathaway group of insurance companies with a current
A. M. Best rating of A++. National Indemnity has agreed to
reinsure all of Equitas’ liabilities up to a limit of $5.7 billion over and
above the March 2006 reserves ($8.7 billion) of Equitas less adjustments
for
payments and recoveries since that date. National Indemnity will also take
on the staff and operations of Equitas and manage the run-off of Equitas’
liabilities. Upon the completion of this phase of the transaction,
Ashland reassessed its assumptions for the receivable recorded from
Equitas. As a result of the improved credit quality associated with
Equitas’ reinsurance of liabilities, Ashland increased its recorded receivable
by $21 million during the current quarter.
At
March 31, 2007, Ashland’s receivable for recoveries of litigation defense
and claim settlement costs from insurers amounted to $479 million, of which
$83 million relates to costs previously paid. Receivables from
insurers amounted to $474 million at September 30, 2006 and $375 million at
March 31, 2006. The receivable was increased by
$104 million during the June 2006 quarter, reflecting the updated model
used for purposes of valuing the reserve described above, and its impact
on the
valuation of future recoveries from insurers. Approximately 31% of
the estimated receivables from insurance companies at March 31, 2007 are
expected to be due from Equitas and other London companies. Of the
remainder, approximately 97% is expected to come from companies or groups
that
are rated A or higher by A. M. Best.
ASHLAND
INC. AND CONSOLIDATED
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
K – LITIGATION, CLAIMS AND CONTINGENCIES (continued)
Environmental
remediation
Ashland
is subject to various federal, state and local environmental laws and
regulations that require environmental assessment or remediation efforts
(collectively environmental remediation) at multiple locations. At
March 31, 2007, such locations included 69 waste treatment or disposal
sites where Ashland has been identified as a potentially responsible party
under
Superfund or similar state laws, 115 current and former operating facilities
(including certain operating facilities conveyed to MAP) and about 1,230
service
station properties, of which 233 are being actively remediated. Ashland’s
reserves for environmental remediation amounted to $190 million at
March 31, 2007, compared to $199 million at September 30, 2006
and $178 million at March 31, 2006, of which $159 million at
March 31, 2007, $168 million at September 30, 2006 and
$145 million at March 31, 2006 were classified in noncurrent
liabilities on the Condensed Consolidated Balance Sheets. The total
reserves for environmental remediation reflect Ashland’s estimates of the most
likely costs that will be incurred over an extended period to remediate
identified conditions for which the costs are reasonably estimable, without
regard to any third-party recoveries. Engineering studies,
probability techniques, historical experience and other factors are used
to
identify and evaluate remediation alternatives and their related costs in
determining the estimated reserves for environmental
remediation. Ashland regularly adjusts its reserves as environmental
remediation continues. Environmental remediation expense amounted to
$4 million for the six months ended March 31, 2007 and
$15 million for the six months ended March 31, 2006, and annual
expense was $57 million in 2006, $52 million in 2005 and $7 million in
2004.
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 $310
million. No individual remediation location is material to Ashland,
as its largest reserve for any site is less than 10% of the remediation reserve.
Other
legal proceedings
In
addition to the matters described above, there are various claims, lawsuits
and
administrative proceedings pending or threatened against Ashland and its
current
and former subsidiaries. Such actions are with respect 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.
ASHLAND
INC. AND CONSOLIDATED
SUBSIDIARIES
INFORMATION
BY INDUSTRY SEGMENT
|
|
|
|
|
|
|
|
|
Three
months ended March 31
|
|
|
Six
months ended March 31
|
|
(In
millions - unaudited)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Materials (a)
|
|
$ |
376
|
|
|
$ |
347
|
|
|
$ |
742
|
|
|
$ |
698
|
|
Distribution
|
|
|
1,008
|
|
|
|
1,029
|
|
|
|
1,956
|
|
|
|
1,996
|
|
Valvoline
|
|
|
382
|
|
|
|
353
|
|
|
|
734
|
|
|
|
663
|
|
Water
Technologies (a)
|
|
|
190
|
|
|
|
100
|
|
|
|
368
|
|
|
|
197
|
|
Intersegment
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Materials (a)
|
|
|
(39 |
) |
|
|
(37 |
) |
|
|
(75 |
) |
|
|
(69 |
) |
Distribution
|
|
|
(2 |
) |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
(11 |
) |
Valvoline
|
|
|
-
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Water
Technologies (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
1,915
|
|
|
|
1,786
|
|
|
|
3,717
|
|
|
|
3,472
|
|
Equity
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Materials
(a)
|
|
|
3
|
|
|
|
3
|
|
|
|
5
|
|
|
|
5
|
|
Valvoline
|
|
|
-
|
|
|
|
(1 |
) |
|
|
1
|
|
|
|
(1 |
) |
|
|
|
3
|
|
|
|
2
|
|
|
|
6
|
|
|
|
4
|
|
Other
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Materials (a)
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
Distribution
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Valvoline
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
5
|
|
Water
Technologies (a)
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
Unallocated
and other
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
14
|
|
|
|
14
|
|
|
|
$ |
1,925
|
|
|
$ |
1,795
|
|
|
$ |
3,737
|
|
|
$ |
3,490
|
|
OPERATING
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Materials (a)
|
|
$ |
23
|
|
|
$ |
27
|
|
|
$ |
48
|
|
|
$ |
53
|
|
Distribution
|
|
|
20
|
|
|
|
30
|
|
|
|
34
|
|
|
|
65
|
|
Valvoline
|
|
|
22
|
|
|
|
2
|
|
|
|
40
|
|
|
|
3
|
|
Water
Technologies (a)
|
|
|
6
|
|
|
|
(1 |
) |
|
|
12
|
|
|
|
-
|
|
Unallocated
and other (b)
|
|
|
(30 |
) |
|
|
(9 |
) |
|
|
(35 |
) |
|
|
(26 |
) |
|
|
$ |
41
|
|
|
$ |
49
|
|
|
$ |
99
|
|
|
$ |
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In
June 2006, Ashland redefined its reportable business segments as
it
continues to evolve into a diversified chemical
company. Performance Materials and Water Technologies, formerly
combined under Ashland Specialty Chemical, have now been separately
disclosed. Prior periods have been conformed to the current
period presentation.
|
(b)
|
The
current quarter includes a $25 million charge for costs associated
with
Ashland’s voluntary severance offer. In addition, corporate
costs previously allocated to APAC of $12 million for the three
months
ended March 31, 2006 and $22 million for the six months ended March
31,
2006 are included.
|
ASHLAND
INC. AND CONSOLIDATED
SUBSIDIARIES
INFORMATION
BY INDUSTRY SEGMENT
|
|
|
|
|
|
|
|
|
Three
months ended March 31
|
|
|
Six months
ended March 31
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE
MATERIALS (a)
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
per shipping day
|
|
$ |
5.9
|
|
|
$ |
5.4
|
|
|
$ |
5.9
|
|
|
$ |
5.6
|
|
Pounds
sold per shipping day
|
|
|
4.7
|
|
|
|
4.5
|
|
|
|
4.8
|
|
|
|
4.9
|
|
Gross
profit as a percent of sales
|
|
|
20.5 |
% |
|
|
23.0 |
% |
|
|
20.8 |
% |
|
|
22.3 |
% |
DISTRIBUTION
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
per shipping day
|
|
$ |
15.7
|
|
|
$ |
16.1
|
|
|
$ |
15.6
|
|
|
$ |
16.0
|
|
Pounds
sold per shipping day
|
|
|
19.8
|
|
|
|
20.3
|
|
|
|
19.4
|
|
|
|
20.4
|
|
Gross
profit as a percent of sales
|
|
|
9.0 |
% |
|
|
9.6 |
% |
|
|
8.8 |
% |
|
|
9.9 |
% |
VALVOLINE
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lubricant
sales (gallons)
|
|
|
41.8
|
|
|
|
44.2
|
|
|
|
80.4
|
|
|
|
82.7
|
|
Premium
lubricants (percent of U.S. branded volumes)
|
|
|
23.3 |
% |
|
|
24.3 |
% |
|
|
22.5 |
% |
|
|
23.7 |
% |
Gross
profit as a percent of sales
|
|
|
25.6 |
% |
|
|
22.0 |
% |
|
|
24.7 |
% |
|
|
22.1 |
% |
WATER
TECHNOLOGIES (a)
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
per shipping day
|
|
$ |
3.0
|
|
|
$ |
1.6
|
|
|
$ |
3.0
|
|
|
$ |
1.6
|
|
Gross
profit as a percent of sales
|
|
|
38.8 |
% |
|
|
47.2 |
% |
|
|
39.5 |
% |
|
|
47.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Sales
are defined as sales and operating revenues. Gross profit is
defined as sales and operating revenues, less cost of sales and
operating
expenses.
|
(b) |
In
June 2006, Ashland redefined its reporting segments as it continues
to
evolve into a diversified chemical company. Performance Materials
and Water Technologies, formerly combined under Ashland Specialty
Chemical, have now been separately disclosed. Prior periods have
been conformed to the current period
presentation. |
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
Current
Quarter – Ashland
reported
net
income
of
$49
million,
or $.77 per
share, for the quarter ended March 31, 2007, compared
to
$49 million, or
$.67 per share,
for
the quarter ended March 31,
2006. The
increase in
earnings per share in the March 2007 quarter reflects the significant shares
repurchased since March 31, 2006, which lowered total shares
outstanding. Net income in the March 2007 quarter benefited
from $18 million of after-tax income from discontinued operations, a result
of the improved credit quality of Ashland’s insurance receivable from Equitas
Limited (Equitas), which provides a significant portion of Ashland’s coverage
for asbestos claims. Also in the March 2007 quarter, net income was
reduced by $15 million after-tax for costs associated with Ashland’s
previously disclosed voluntary severance offer.
Operating
income for the March 2007 quarter totaled $41 million, which included a
$25 million pretax charge related to the voluntary severance offer.
Operating income for the March 2006 quarter was $49 million, which included
$12 million of corporate costs from Ashland Paving And Construction, Inc.
(APAC) that were retained within continuing operations following the
sale of APAC in August 2006. The majority of corporate costs previously
allocated to APAC have been eliminated, with further cost reductions to be
achieved under the voluntary severance offer throughout the remainder of
the
year.
Valvoline
has continued its significant rebound in earnings, benefiting from stabilizing
base oil costs and the full effects of previously announced price
increases. Water Technologies recorded improved results compared to
the prior quarter, with both the marine and industrials business showing
significant progress. However, weakness in North American industrial
production as well as the termination of the North American plastics supply
contract with Dow Chemical adversely affected Distribution’s
results. Performance Materials’ gross profit margin was also
impacted by weak demand within the automotive, residential housing and marine
markets, which contributed to lower earnings.
In
the
June 2006 quarter, Ashland redefined its reportable business segments as
it
continues to evolve into a diversified chemical company. Performance
Materials and Water Technologies, formerly combined under Ashland Specialty
Chemical, have now been separately disclosed since these businesses serve
different markets, and recent acquisitions have made Water Technologies a
much
larger and more distinct part of Ashland.
Year-to-Date – Ashland’s net
income for the six months ended March 31, 2007 was $98 million, or $1.52
per
share, a 14% decrease compared to $114 million, or $1.57 per share, for the
six
months ended March 31, 2006. The net income comparison is primarily
affected by the operating results of APAC in the prior period, which was
sold in
August 2006 and qualified as a discontinued operation in the Statements of
Consolidated Income. As a result, discontinued operations for the
prior period includes APAC’s $31 million after-tax operating results, while
the $14 million reported in the current period was primarily due to the increase
in the asbestos receivable.
Operating
income was $99 million for the six months ended March 31, 2007, a 4% increase
compared to the $95 million reported during the prior
period. Valvoline reported significant improvement as operating
income increased to $40 million compared to $3 million in the 2006 period,
primarily due to stronger gross profit margins. Water Technologies
reported operating income of $12 million, a substantial increase over prior
year
results due to improved performance from both the marine and industrial business
as well as contribution from the Environmental and Process Solutions (E&PS)
business which was acquired from Degussa AG in May 2006. Performance
Materials and Distribution both reported lower operating income results compared
to the prior period primarily due to continued weakness in North American
industrial production during the first half of the current year. The
unallocated and other caption includes a $25 million voluntary severance
offer charge in the current period, while the prior period included
$22 million of corporate costs previously allocated to APAC that were
retained within this caption to comply with the presentation requirements
of
generally accepted accounting principles.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Performance
Materials
Current
Quarter – Performance Materials reported operating income of
$23 million for the March 2007 quarter, a decrease of 17% compared to
$27 million for the March 2006 quarter. Gross profit margin
decreased from 23.0% in March 2006 to 20.5% in March 2007, primarily due
to weak
North American demand within the automotive, residential construction and
marine
markets, coupled with selected raw material increases. Sales and
operating revenues increased 8% to $376 million in the March 2007 quarter
from
$347 million in the March 2006 quarter while volume increased 4% from
4.5 million pounds per shipping day in the prior quarter to
4.7 million pounds per shipping day in the current quarter, aided by the
acquisitions of Northwest Coatings and the purchase of third-party ownership
interests in a former Japanese joint venture. The increase in volume
largely offset the decrease in gross profit as a percent of sales for the
quarter. Selling, general and administrative expenses increased
$3 million in the current quarter primarily due to increased investment in
international expansion within the Casting Solutions business as well as
an
increase in the allowance for doubtful accounts.
Year-to-Date –
Performance Materials earned operating income of $48 million for the six
months ended March 31, 2007, a 9% decrease from the $53 million earned
for the six months ended March 31, 2006. The gross profit margin
decreased to 20.8% in the current period from 22.3%. Sales and
operating revenues increased 6% to $742 million in the current period from
$698
million while pounds per shipping day decreased 2% from 4.9 million pounds
per
shipping day for the six months ended March 31, 2006 to 4.8 million
pounds for the current period. The decrease in operating income from
margin was primarily offset by changes in product mix, which increased sales
and
operating revenue during the current period. Selling, general and
administrative expenses in the current period increased $6 million compared
to the 2006 period primarily due to increased investment in international
expansion within the Casting Solutions business.
Distribution
Current
Quarter – Distribution reported operating income of $20 million for the
March 2007 quarter, a 34% decrease from the $30 million earned in the March
2006
quarter, where continued hurricane-related product shortages and increased
demand resulted in stronger margins and record operating
income. Sales and operating revenues declined 2% from
$1,029 million in the March 2006 quarter to $1,008 million in the
March 2007 quarter, reflecting a 2% reduction in volume. Pounds
sold per shipping day decreased in the current quarter to 19.8 million
pounds from 20.3 million pounds in the March 2006 quarter, resulting in a
$2 million decline in operating income. Gross profit as a
percent of sales declined to 9.0% in the current quarter from 9.6%, primarily
due to unusually high margins in the prior quarter, resulting from hurricane
supply disruptions, which increased demand. The decline in gross
profit margin lowered operating income by $6 million compared to the March
2006 quarter. Selling, general and administrative expenses increased
approximately $3 million during the current quarter as costs lingered from
the
implementation of Ashland’s new SAP™ enterprise resource planning system in
December 2006.
Year-to-Date –
Distribution earned operating income of $34 million for the six months
ended March 31, 2007, a 48% decrease from the record $65 million earned for
the six months ended March 31, 2006. Sales and operating revenues
decreased 2% from $1,996 million for the six months ended March 31,
2006 to $1,956 million for the six months ended March 31,
2007. Pounds sold per shipping day decreased in the current period to
19.4 million pounds from 20.4 million pounds in the prior period,
resulting in a $9 million decrease in operating income. Gross profit
as a percent of sales declined from 9.9% to 8.8%, primarily due to unusually
high margins in the prior period, resulting from hurricane supply disruptions,
which increased demand. The decline in gross profit margin
lowered operating income by $16 million compared to the prior period
results. Selling, general and administrative expenses increased
approximately $6 million during the current period primarily resulting from
the
December implementation of Ashland’s new SAP™ enterprise resource planning
system.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Valvoline
Current
Quarter – Valvoline reported strong operating income results of
$22 million during the current quarter compared to $2 million in the
March 2006 quarter. The primary factor in improved earnings was the
increase in gross profit as a percent of sales from 22.0% in the March 2006
quarter to 25.6% in the current quarter, as the base lube oil market continued
to remain stable allowing Valvoline to recover its increased costs despite
the
margin still remaining below historical levels. This increase in
gross profit margin during the current quarter contributed $19 million to
operating income. Sales and operating revenues increased 8% over the
March 2006 quarter to $382 million, reflecting increased pricing as volume
levels decreased 5% to 41.8 million lubricant gallons from 44.2 million
lubricant gallons in the prior year quarter. Despite this decrease in
volume, improved product mix contributed $1 million to operating
income. Valvoline Instant Oil Change reported an increase in same
store sales during the current quarter, while customer satisfaction ratings
continue to show significant improvement in the overall consumer
experience.
Year-to-Date –
Valvoline reported record operating income of $40 million for the six
months ended March 31, 2007, compared to operating income of
$3 million for the six months ended March 31, 2006. The
operating income improvement primarily reflects the gross profit margin
recovery, increasing to 24.7% in the current period from 22.1% as a result
of
stable base oil costs and the full effect of previous price
increases. This increase in gross profit margin during the current
period contributed $36 million to operating income. Sales and
operating revenues increased 11% over the 2006 period to $734 million
reflecting increased pricing as volume levels decreased 3% from 82.7 million
lubricant gallons to 80.4 million lubricant gallons in the current
period. Despite the volume decrease, improved product mix on higher
margin products limited the impact to operating income.
Water
Technologies
Current
Quarter – Water Technologies recorded operating income of
$6 million during the March 2007 quarter compared to the $1 million
loss reported in the March 2006 quarter. The increase in operating
income during the current quarter primarily relates to an improved gross
profit
margin in the marine and industrial businesses as well as a combined 6% revenue
increase in these businesses. The Environmental and Process Solutions
(E&PS) business also contributed to operating income, but to a much lesser
extent. Sales and operating revenues increased 90% to
$190 million in the current quarter compared to $100 million in the
prior year’s quarter, primarily due to the $85 million in sales and
operating revenues contributed by the E&PS business. Gross profit as a
percent of sales decreased to 38.8% in the current period from 47.2%, reflecting
the lower-margin E&PS business as opposed to gross profit margin declines in
the industrial and marine businesses.
Year-to-Date –
Water Technologies reported operating income of $12 million for the six
months ended March 31, 2007, compared to break-even results for the six
months ended March 31, 2006. Sales and operating revenues
increased 87% to $368 million in the current period compared to
$197 million in the prior period, primarily due to the
$163 million in sales and operating revenues contributed by the E&PS
business. The marine and industrial businesses’ combined revenue
increase of 6% compared to the prior period, as well as an improving gross
profit margin, have been the primary factors in the operating income improvement
in the current period, while inclusion of the E&PS business has also
contributed to operating income growth.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Unallocated
and other
Unallocated
and other costs were $30 million in the March 2007 quarter compared to
$9 million in the March 2006 quarter. The current quarter
includes a $25 million charge for costs associated with Ashland’s previously
announced voluntary severance offer. The March 2006 quarter included
$12 million of corporate costs previously allocated to APAC that were
included in this caption to reflect required generally accepted accounting
principles presentation within the Statements of Consolidated
Income. In addition, the prior quarter had a $5 million favorable
adjustment to the previously estimated withdrawal premium for Oil Insurance
Limited, the energy-industry mutual insurance consortium from which Ashland
terminated its participation in December 2005. Unallocated and other
costs for the six months ended March 31, 2007 were
$35 million, compared to $26 million for the six months ended March
31, 2006. The prior period included $22 million of corporate
costs previously allocated to APAC.
Loss
on the MAP Transaction
Ashland
recorded a loss on the MAP Transaction of $4 million for the three and six
months ended March 31, 2007 and a $3 million and $2 million loss,
respectively, for the three and six months ended March 31, 2006 as a result
of a decrease in the discounted receivable from Marathon for the estimated
present value of future tax deductions. See Note E of the Notes to
Consolidated Financial Statements in Ashland’s Annual Report on Form 10-K for
the fiscal year ended September 30, 2006, for further explanation of this
receivable.
Net
interest and other financing income
Net
interest and other financing income amounted to $9 million in the March
2007 quarter, compared to $9 million in the March 2006
quarter. The comparable amounts for each period reflect the
consistent level of investments held within Ashland’s portfolio during both
quarters.
Net
interest and other financing income was $25 million for the six months
ended March 31, 2007, compared to $20 million for the six months ended March
31,
2006. The increase in the current period is due to the investment of
the remaining proceeds from the APAC sale before these funds were utilized
early
in the current fiscal year as part of the share repurchase program and special
dividend paid on October 25, 2006.
Income
taxes
Ashland’s
effective income tax rate was 32.9% for the March 2007 quarter compared to
9.9% for the March 2006 quarter. The effective tax rate for the
current quarter, after adjusting for the MAP Transaction, includes an additional
$1 million charge for various tax contingency adjustments. Excluding this
charge and the MAP Transaction adjustment, the current quarter rate would
have
been 28.5%. The prior quarter rate reflects credits of $8
million for tax contingency and research and development adjustments, plus
a $4 million reclassification of certain deferred tax benefits related to
previously owned businesses of Ashland. Excluding these credits,
the prior quarter rate would have been 31.9%. Ashland’s effective
income tax rate for the six months ended March 31, 2007 was 30.2% compared
to
25.0% for the prior year period. Excluding the adjustments noted in
the quarters above, the current period rate would have been 28.5% while prior
period’s rate would have been 35.7%. For the remainder of fiscal year
2007, Ashland estimates an effective tax rate of 28%.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Discontinued
operations (net of income taxes)
Income
from discontinued operations was $18 million in the March 2007 quarter
compared to a loss of $1 million in the March 2006 quarter. The
income in the current quarter reflects the improved credit quality of
Ashland’s insurance receivable from Equitas, following Equitas’ transaction with
Berkshire Hathaway. Income from discontinued operations for the six
months ended March 31, 2007 was $14 million compared to the $30 million
recorded for the six months ended March 31, 2006. The results for the
three and six months ended March 31, 2006 include APAC’s after-tax operating
earnings of a $1 million loss and $31 million income,
respectively. These prior period results exclude corporate costs
previously allocated to APAC which were retained within operating income
under
“unallocated and other.” For further information on the sale of APAC and
its classification as a discontinued operation see Note C to the Condensed
Consolidated Financial Statements.
FINANCIAL
POSITION
Liquidity
Cash
flows from operating activities from continuing operations, a major source
of
Ashland’s liquidity, amounted to a cash outflow of $83 million for the six
months ended March 31, 2007, compared to a cash outflow of
$152 million for the six months ended March 31, 2006. The
cash outflow for the current period reflects a $223 million cash
outflow resulting from a change in operating assets and
liabilities. The largest component of this change was a
$121 million decrease in trade and other payables, which includes a
$22 million contribution to Ashland’s pension plans as well as the seasonal
decline in accounts payable. Ashland typically accelerates payments
to vendors at the beginning of its fiscal year, which coincides with many
of the
vendors December fiscal year-ends, versus delaying some payments at the end
of September. The prior period had a similar seasonal decline in
trade and other payables of $126 million.
Following
the MAP Transaction in June 2005, Moody’s lowered Ashland’s senior debt rating
from Baa2 to Ba1, their highest non-investment grade rating, and also lowered
Ashland’s commercial paper rating from P-3 to N-P (Not-Prime), citing the annual
cash flow lost from the operations sold. In August 2006, Standard
& Poor’s lowered Ashland’s senior debt rating from BBB- to BB+, their
highest non-investment grade rating, and lowered Ashland’s commercial paper
rating from A-3 to B, citing Ashland’s intention to distribute the APAC proceeds
to shareholders instead of using the proceeds for business
investment. In November 2006, Ashland terminated its commercial paper
program.
In
April
2007, Ashland replaced its revolving credit agreement with a new five year
revolving credit facility which provides for up to $300 million in
borrowings. Up to an additional $100 million in borrowings is
available with the consent of one or more of the lenders. The
borrowing capacity under this new facility would have been reduced by $105
million for letters of credit outstanding under the credit agreement at March
31, 2007. The revolving credit agreement contains a covenant limiting
the total debt Ashland may incur from all sources as a function of Ashland’s
stockholders’ equity. The covenant’s terms would have permitted
Ashland to borrow $4.3 billion at March 31, 2007, in addition to the actual
total debt incurred at that time. Permissible total Ashland debt
under the covenant’s terms increases (or decreases) by 150% of any increase (or
decrease) in stockholders’ equity.
At
March 31, 2007, working capital (excluding debt due within one year)
amounted to $1,979 million, compared to $2,221 million at September 30,
2006 and $1,941 million at March 31, 2006 (excluding assets and
liabilities of discontinued operations). 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 $141 million at
March 31, 2007, $147 million at September 30, 2006 and
$140 million at March 31, 2006. Liquid assets (cash, cash
equivalents, available-for-sale securities and accounts receivable)
amounted to 205% of current liabilities at March 31, 2007,
compared to 175% at September 30, 2006 and 216% at March 31, 2006
(excluding applicable assets and liabilities of discontinued
operations). Ashland has defeased $39 million of its outstanding debt
at March 31, 2007 with $44 million recorded at September 30, 2006 and
$49 million recorded at March 31, 2006. See Note E to the
Condensed Consolidated Financial Statements for further information on debt
defeasance.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Capital
resources
On
September 14, 2006, Ashland’s Board of Directors authorized the
distribution of a substantial portion of the proceeds of the sale of APAC
to the
Ashland Common Stock shareholders as a one-time special
dividend. Each shareholder of record as of October 10, 2006, received
$10.20 per share, for a total of $674 million. This amount was
accrued as dividends payable in the Condensed Consolidated Balance Sheet
at
September 30, 2006 and subsequently paid in the December 2006
quarter. Substantially all of the remaining proceeds were directed to
be used to repurchase Ashland Common Stock in accordance with the terms
authorized by Ashland’s Board of Directors. Ashland repurchased 4.7
million shares for $288 million for the six months ended March 31, 2007 and
2.4 million shares for $138 million for the six months ended March 31,
2006. See Note J to the Condensed Consolidated Financial Statements
for a description of Ashland’s share repurchase programs.
For
the
six months ended March 31, 2007, property additions amounted to
$66 million, compared to $75 million for the same period last
year. Ashland anticipates meeting its remaining 2007 capital
requirements for property additions and dividends from internally generated
funds.
Ashland’s
debt level amounted to $77 million at March 31, 2007, compared to
$82 million at September 30, 2006 and $89 million at
March 31, 2006. Debt as a percent of capital employed amounted
to 2.6% at March 31, 2007, compared to 2.6% at September 30, 2006 and 2.4%
at March 31, 2006.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
There
have been no material changes in the critical accounting policies described
in
Management’s Discussion and Analysis in Ashland’s Annual Report on Form
10-K for the fiscal year ended September 30, 2006. For a
discussion of Ashland’s asbestos-related litigation and environmental
remediation matters, see Note K to the Condensed Consolidated Financial
Statements.
OUTLOOK
The
March
2007 quarter was the second full quarter for Ashland as a singularly focused,
diversified chemical company that included the successful implementation
of the
SAP™ enterprise resource planning system for both Performance Materials and
Water Technologies. With these two businesses completing the
implementation this quarter, all of Ashland’s operations in the United States,
Canada and Mexico are now unified and operating on a single SAP™
system.
Performance
Materials’ results for the second half of 2007 will, in large part, continue to
be determined by the pace of volume recovery in the North American automotive,
residential housing and marine markets. In addition, costs for
selected raw materials remain a concern as weak market demand can inhibit
recovery of increased material costs. However, the third quarter is
traditionally the strongest quarter for Performance Materials across its
three
business groups. As a result, these businesses will likely benefit
from that seasonality.
Distribution’s
performance will also be contingent upon the North American
economy. Excluding the impact of any significant change in the
economic environment, Distribution should benefit from the normal seasonal
increase in demand during the upcoming third quarter. However, the
seasonal benefit will likely be offset somewhat by the transition of customers
from Dow Chemical products. Distribution’s contract with Dow Chemical
to distribute its plastics in North America ended March 1,
2007. During this transition phase the impact on Distribution’s
profitability from the business lost is expected to be approximately $4 to
$5 million per quarter. Ashland continues to aggressively attempt to
qualify alternate products with customers and convert as much of this business
as possible to plastics provided by other suppliers, including new supply
contracts with three world-class suppliers: Exxon/Mobil, Sunoco and
BASF. With these new supplier agreements in place, the financial
effects will diminish over time and better position Ashland’s supplier base
long-term.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OUTLOOK
(continued)
Valvoline’s
record operating income, due to the recovery of its gross profit margin,
highlighted the first half of Ashland’s 2007 fiscal year. As a result
of this strong first half performance and due to seasonal programs and
increasing competitive pressures, Valvoline expects to modestly increase
marketing and promotional spending in the second half of the fiscal
year. Weaker demand for oil continues to be an ongoing factor for
Valvoline, as well as the United States motor oil market as a whole, which
is
expected to be stable to slightly declining on an annual basis over the next
five years. Despite this projected weakness in demand, Valvoline
should continue to benefit from stable base oil costs and better supply,
enabling its recent strong performance to continue.
Water
Technologies’ improvement during the current quarter is encouraging, although
overall return on capital is still below Ashland’s expectation for its
businesses. As a result, Water Technologies has aggressively pursued
a redesign of its business model. In addition, various cost saving
initiatives are being reviewed. As the redesign and cost saving
programs are fully implemented in future periods, profitability and growth
will
continue to be the key focus for this business.
Ashland’s
capital expenditures for the first half of fiscal 2007 were $66 million,
which
is 34% of the $193 million budget. Increased capital
expenditures will occur in the second half of fiscal 2007 but will likely
fall
approximately $30 million short of the budgeted amount. Ashland also
anticipates that 100 corporate positions will be eliminated by fall in
conjunction with its voluntary severance program offered in December
2006. This program was designed to eliminate remaining corporate
costs previously allocated to APAC in conjunction with its sale in August
2006
as well as improve Ashland’s overall competitiveness. Since employee
termination dates will continue to occur over the next several months, the
estimated cost savings of approximately $10 to $12 million pretax annually
will not begin to be fully realized until December 2007.
In
summary, Ashland expects the strength of Valvoline’s continued recovery to more
than offset the anticipated weakness from Performance Materials and Distribution
for the upcoming third quarter compared to the June 2006 quarter. In
total, Ashland anticipates its businesses to report operating income that
exceeds the prior year’s third quarter.
FORWARD
LOOKING STATEMENTS
Management’s
Discussion and Analysis (MD&A) contains forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the
Securities Exchange Act of 1934. These statements include those that
refer to Ashland’s operating performance, earnings, and benefits expected to be
obtained through the GlobalOne enterprise resource planning
implementation. These estimates are based upon a number of
assumptions, including those mentioned within MD&A. Such
estimates are also based upon internal forecasts and analyses of current
and
future market conditions and trends, management plans and strategies, weather,
operating efficiencies and economic conditions, such as prices, supply and
demand, cost of raw materials, and legal proceedings and claims (including
environmental and asbestos matters). Although Ashland believes its
expectations are based on reasonable assumptions, it cannot assure the
expectations reflected herein will be achieved. This forward-looking
information may prove to be inaccurate and actual results may differ
significantly from those anticipated if one or more of the underlying
assumptions or expectations proves to be inaccurate or is unrealized or if
other
unexpected conditions or events occur. Other factors and risks
affecting Ashland are contained in its Annual Report on Form 10-K for the
fiscal
year ended September 30, 2006. Ashland undertakes no obligation to
subsequently update or revise these forward-looking statements.
ASHLAND
INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Ashland’s
market risk exposure at March 31, 2007 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, 2006.
ITEM
4. CONTROLS AND PROCEDURES
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(a)
|
As
of the end of the period covered by this quarterly report, Ashland,
under
the supervision and with the participation of its management, including
Ashland’s Chief Executive Officer and its Chief Financial Officer,
evaluated the effectiveness of Ashland’s disclosure controls and
procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated
under the
Securities Exchange Act of 1934, as
amended. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that
the
disclosure controls and procedures were
effective.
|
|
(b)
|
During
the quarter ended March 31, 2007, as part of an ongoing SAP™ enterprise
resource planning (ERP) project, the ERP system was implemented
for the
U.S. operations of Performance Materials and Water
Technologies. Also, during the quarter ended December 31, 2006,
the ERP system was implemented for the U.S. operations of Valvoline
and
Distribution as well as certain corporate functions. Although
management believes internal controls have been maintained or enhanced
by
the ERP systems implemented during fiscal 2007, the controls in
the newly
upgraded environments have not been completely tested. As such,
there is a risk that deficiencies may exist and not yet be identified
that
could constitute significant deficiencies or in the aggregate,
a material
weakness. Management will be performing tests of controls
relating to the new SAP™ environment in these business units over the
course of fiscal 2007. Otherwise, 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.
|
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 March 31,
2007. In these active lawsuits, approximately 0.4% 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
0.1% of the active lawsuits involve claims between $5 million and $10
million; less than 2% of the active lawsuits involve claims between $10
million and $15 million; and less than .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 K of “Notes to Condensed Consolidated Financial
Statements” in this quarterly report on Form 10-Q.
Foundry
Class Action – In response to an investigation by the United States
Department of Justice that was closed in 2006 without criminal or civil
allegations being made by the government, several foundry owners have filed
lawsuits seeking class action status for classes of customers of foundry
resins
manufacturers such as Ashland. In May 2007, the United States
District Court, Southern District of Ohio entered an order certifying a class
for the civil lawsuits. Ashland will vigorously defend these civil
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 March
31, 2007, Ashland had been named a PRP at 69 waste treatment or disposal
sites.
These sites are currently subject to ongoing investigation and remedial
activities, overseen by the United States Environmental Protection Agency
(“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.
(2)
TSCA Audit – On April 30, 2007, in an action initiated by
Ashland, the company signed a Consent Agreement and Final Order (“CAFO”) with
the USEPA. Pending the Environmental Appeals
Board’s
(“EAB’s”) approval of the CAFO, Ashland will conduct a compliance audit in
accordance with Section 5 and Section 13 of the Toxic Substances Control
Act
(“TSCA”), which regulates activities with respect to manufacturing, importing
and exporting chemical substances in the United States. Pursuant to
the CAFO, Ashland will report any violations discovered. In addition,
the CAFO provides for certain reduced penalties for discovered
violations. While it is reasonable to believe the penalties for
violations reported could exceed $100,000 in the aggregate, any such penalties
should not be material to Ashland. The audit will be completed within
eighteen months of the EAB’s approval of the CAFO.
For
additional information regarding environmental matters and reserves, see
Note K
of “Notes to Condensed Consolidated Financial Statements” in this quarterly
report on Form 10-Q.
MTBE
Litigation – Ashland is a defendant along with many other
companies in approximately 40 cases alleging methyl tertiary-butyl ether
(“MTBE”) contamination in groundwater. Nearly all of these cases have
been consolidated in a multi-district litigation in the Southern District
of New
York for preliminary proceedings. The plaintiffs generally are water
providers or governmental authorities and they allege that refiners,
manufacturers and sellers of gasoline containing MTBE are liable for
manufacturing a defective product and that owners and operators of retail
gasoline sites have allowed MTBE to be discharged into the groundwater.
Ashland’s involvement in these cases relates to gasoline containing MTBE
allegedly produced and sold by Ashland, or one or more of its subsidiaries,
in
the period prior to the formation of Marathon Ashland Petroleum LLC
(“MAP”). Ashland only distributed MTBE or gasoline containing MTBE in
a limited number of states and has been dismissed in a number of cases in
which
it was established that Ashland did not market MTBE or gasoline containing
MTBE
in the state or region at issue. Many MTBE cases allege class action
status and seek punitive damages or treble damages under a variety of statutes
and theories. The potential impact of these cases and any future similar
cases is uncertain. Ashland will vigorously defend these
actions.
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
1A. RISK FACTORS
During
the period covered by this report, one of the risk factors previously disclosed
in Ashland’s Form 10-K for the year ended September 30, 2006, as updated in
Ashland’s Form 10-Q for the quarter ended December 31, 2006, materially changed.
The risk factor regarding the implementation of an enterprise resource
planning project is now amended to read in its entirety as set forth
below.
Ashland’s
implementation of its SAP™ enterprise resource planning (“ERP”) project has the
potential for business interruption and associated adverse impact on operating
results as well as internal controls.
In
2004,
Ashland initiated a multi-year ERP project that is expected to achieve increased
efficiency and effectiveness in supply chain, financial and environmental,
health and safety processes. The ERP system was implemented in Canada
in fiscal 2006. During the first fiscal quarter of 2007, the ERP
system was implemented in the U.S. operations of Valvoline and Distribution
as
well as certain corporate functions. The ERP system was implemented
in February 2007 for the U.S. operations of Performance Materials and Water
Technologies. Under its revised ERP implementation schedule, Ashland
now intends to begin implementing the ERP system for most of its remaining
operations, including those in Europe, in fiscal 2008. Extensive
planning has occurred to support effective implementation of the ERP system;
however, such implementations carry certain risks, including potential
for business interruption with the associated adverse impact on operating
income. In addition, internal controls that are modified or
redesigned to support the new ERP system may not have been completely
tested. As a result, there is a risk that deficiencies may or will
exist in the future, and could constitute significant deficiencies, or in
the
aggregate, a material weakness.
ITEM
5. OTHER INFORMATION
On
May 7,
2007, Ashland and Cargill Incorporated announced that they have agreed in
principle to create a new joint venture devoted solely to the development
and
production of biobased chemicals. Each company will own 50 percent of the
new
stand-alone entity. The venture’s first product will be a high-grade
propylene glycol produced from glycerin, a co-product of biodiesel production.
The venture anticipates a combined initial capital investment in the range
of $80 million to $100 million.
ITEM
6. EXHIBITS
|
10
|
Amendment
No. 2 to Ashland Inc. Supplemental Early Retirement Plan for Certain
Employees.
|
|
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.
|
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:
May
9, 2007
|
/s/
J. Marvin Quin |
|
|
J.
Marvin Quin |
|
|
Senior
Vice President and Chief
Financial Officer |
|
|
(on
behalf of the
Registrant and as principal |
|
|
financial
officer) |
|
EXHIBIT
INDEX
|
10
|
Amendment
No. 2 to Ashland Inc. Supplemental Early Retirement Plan for Certain
Employees.
|
|
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.
|